February 9, 2017 / 6:02 AM / in 8 months

Mexico seen raising interest rates after gasoline price hike

MEXICO CITY, Feb 9 (Reuters) - Mexico’s central bank is expected to raise interest rates on Thursday after a jump in inflation due to a double-digit gasoline price hike and a weak exchange rate.

The Banco de Mexico is likely to raise its benchmark interest rate on Thursday to 6.25 percent from the 5.75 percent rate it set in December’s meeting, according to 14 of 18 analysts polled last week by Reuters.

“Inflation expectations are clearly rising,” Nomura analyst Benito Berber wrote in a note on Wednesday, noting the central bank had consistently delivered 50 basis point hikes “when it was needed.”

Mexico’s annual inflation rate is expected to have shot up in January to 4.70 percent, which would be its fastest pace in over four years, driven by a 14 percent increase in regular gasoline prices at the start of the month.

In a central bank poll last week, analysts raised their expectations for inflation this year to 5.24 percent, up more than a percentage point above a poll in December, while the outlook for 2018 rose 20 basis points to 3.80 percent.

Last month, central bank chief Agustin Carstens said the impact on inflation from the gasoline price hike will be transitory and he said that policymakers could hurt the economy if they overreact.

The central bank raised rates five times last year, lifting borrowing costs by a cumulative 250 basis points as the peso slid to successive record lows.

The peso tumbled past 22 per dollar to an all-time low just ahead of U.S. President Donald Trump’s inauguration on concerns he would rip up a free trade agreement with Mexico.

But the peso has rallied back about 7 percent since Trump took power after he did not immediately move to slap tariffs on Mexican goods.

The market has diverged from analysts’ views as the peso rebounded. Yields on interest rate swaps are now pointing to a 25 basis point increase.

Some analysts thought the peso’s recent gains as well as the decision by the U.S. Federal Reserve to hold interest rates steady next week could leave room for Mexico to also leave borrowing costs unchanged.

“The recent appreciation of the Mexican peso and the [Fed‘s] decision to maintain the Fed funds rate unchanged in February may be reason enough for Banxico to remain on hold at the next meeting,” said HSBC economist Alexis Milo. (Reporting by Michael O‘Boyle; editing by Diane Craft)

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