Mexico puts market on notice for post-Fed rate hike
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Emerging Markets

Mexico puts market on notice for post-Fed rate hike

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Mexico’s open economy and and close links to the American economy means it will have little choice but to follow the Federal reserve with another rate hike, its deputy central bank governor tells Emerging Markets. But the economy continues to boast only anaemic growth

Mexico sent a strong signal on Friday that it stands ready to follow the US Federal Reserve with another rate hike as soon as June if the American central bank tightens monetary policy again.

Javier Guzman, deputy governor of the central bank of Mexico, said he hoped that the Fed would “alleviate market anxiety” ahead of its next interest rate hike, which is expected for the middle of the year.

He said he could not make a “definitive judgement” but told Emerging Markets: “To the extent that we face a situation of anxiety in international financial markets, high levels of exchange rate in Mexico and so on, I think it would be very difficult to decouple from these US moves.

“Given that Mexico’s capital account is very open and given that we have very close links with the US economy, it would be difficult for the Mexican authorities not to increase interest rates in the face of an increase in the US.”

The central bank, known as Banxico, has already raised its own rates by 50bp earlier this year to stem the slide of the peso, and makes little mystery that it is ready to hike again if and when the Fed decides to raise its interest rates.

“They will quite likely follow the Fed,” said Claudio Irigoyen, head of Latin America fixed income strategy at Bank of America Merrill Lynch, who reckons that Banxico will raise its rates by 25bp in June after its previous move in February.

“This was certainly a surprise and the market is concerned about having another surprise like this one,” he told Emerging Markets. The Mexican government also announced budget cuts as part of a fiscal consolidation programme.

DISAPPOINTING GROWTH

Martin Castellanos, at the Institute of International Finance, is forecasting an interest rate hike this year in line with the Fed and another one at the beginning of next year.

The quality of the communication from the Fed will also play an important role. “To the extent that we have proper communication from the Fed — which I expect they will given the most recent experience — and if economic agents perceive that the increase in interest rates is taking place as a result of improved economic prospects, a combination of both of [those] should contribute to alleviate any anxiety significantly that may surround the continuation of normalisation of US monetary policy,” he said.

This comes at a time when many observers have expressed disappointment at the performance of the Mexican economy, which expanded by 2.5% last year and is expected to grow at the same pace this year.

“Mexico is in a very unusual position because it is not in any kind of crisis or going through a storm,” said Joydeep Mukherji, managing director of sovereign ratings at Standard & Poor’s, which recently changed the outlook on Mexico’s BBB+ ratings from stable to negative.

“But it is not booming and it is not creating greater confidence in the private sector. They are not in a storm, but there are more clouds on the horizon. This is not a fire alarm, but these are early indicators that the stability that you see today could lessen over time.”



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