March 30, 2017 / 6:01 AM / 4 months ago

Mexico central bank expected to slow pace of hikes after peso surge

2 Min Read

MEXICO CITY, March 30 (Reuters) - Mexico's central bank is expected to raise its benchmark interest rate for the fifth meeting in a row on Thursday, but following that, policymakers are likely to slow the pace of hikes on the back of a rally in the peso.

The Banco de Mexico is set to raise rates by a quarter percentage point to 6.50 percent, according to 15 of 24 analysts surveyed by Reuters. Seven thought the bank could deliver a half-percentage point hike, while two expected no move.

Mexico's central bank has raised its benchmark rate in 50-basis point moves at all of its previous four meetings as the peso tumbled to successive historic lows and threatened to fan inflation.

That has pushed the benchmark rate to levels not seen since early 2009, when the bank was slashing borrowing costs amid a global financial crisis.

But the peso has rallied back from a record low in January on bets that U.S. President Donald Trump will not impose big tariffs on Mexican exports to the United States and as initial talks about trade have taken a more positive tone.

"Inflation continues to surprise to the upside, but inflation worries have been mitigated by the remarkable rally in the Mexican peso seen over the past couple of months," said Gustavo Rangel, chief Latin America economist at ING in New York.

Mexico's annual inflation rate rose above 5 percent to a nearly eight-year high in early March, but policymakers say it should trend back toward their 3 percent target by next year.

Last week, central bank chief Agustin Carstens said the peso's recovery will help inflation cool back toward 3 percent, while also suggesting the peso could gain more ground.

The peso has gained about 10 percent since the central bank's last decision on Feb. 9 and it is trading at its strongest levels since Trump's election victory in November. (Reporting by Michael O'Boyle; Editing by Bill Rigby)

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