Bank of Mexico Minutes Suggest Interest Rates Could Go Higher

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11/29/2018 | 11:57 pm


By Anthony Harrup



MEXICO CITY -- Mexican central bankers stressed the possibility of following November's interest-rate move with further increases, citing a deteriorating inflation outlook and market uncertainty over the economic policies of President-elect Andrés Manuel López Obrador.



The Mexican central bank's five-member board voted 4-1 on Nov. 15 to lift the overnight interest rate to 8% from 7.75%.



Deputy governor Irene Espinosa, whose appointment in January made her the first woman ever on the Mexican central bank's board, voted in favor of a half-point increase, according to the meeting minutes.



Ms. Espinosa said the selloff in Mexican assets was in large part due to investor concerns over the direction of the economy under the incoming administration of President-elect Andrés Manuel López Obrador, the sustainability of public finances, and future conditions for private investment.



Mr. López Obrador, who takes office Saturday for a six-year term, in late October said he's canceling the $13.3 billion new Mexico City airport under construction, prompting a selloff in local stocks and bonds and weakening the peso.



Markets have been further rattled by legislative proposals that would affect the financial sector, and doubts about the next administration's ability to finance its public-spending plans through budget austerity.



Deputy governor Manuel Ramos Francia, whose term ends in December, voted with the majority for a quarter-point increase, but said in a dissenting opinion that the bank should include longer-term guidance and that interest rates may have to stay higher than foreseen for a prolonged period.



"The fact that two of the five directors are now on record with very hawkish rate views, increases the probability of a follow-up rate hike at the next meeting," said Alberto Ramos, chief Latin America economist at Goldman Sachs.



A majority of board members considered that risks for inflation had increased since the previous meeting, and all agreed that interest rates needed to go higher to avoid delaying even further the bank's goal of getting inflation -- currently at 4.6% -- back to its 3% target.



Some members said domestic issues, including the airport decision, were hurting local financial markets the most.



"They are being quite bold for openly criticizing a number of very specific policies and initiatives that are part of López Obrador's policy platform," said Mr. Ramos. "Whether that could invite some type of friction is to been seen in the future, but they are true to their constitutional mandate, which is to deliver low and stable inflation, so kudos to the central bank."



Mr. López Obrador's designated Finance Minister Carlos Urzúa said Monday that the 2019 budget proposal, to be submitted to Congress in mid-December, will include a primary surplus of around 1% of GDP.



Mr. Urzúa said the incoming government is against proposals by some legislators to swap private-pension funds for a state financial institution and to use central-bank reserves to finance public investment projects. But a bill aimed at reducing the fees that commercial banks charge their customers has some merit, and legislators, officials and the banking industry are discussing possibilities, he added.



The peso has recovered some ground, and stocks have rebounded from a nearly five-year low in the days following his comments.



Write to Anthony Harrup at anthony.harrup@wsj.com





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