Banxico raises rates by 50bp; MXN drops modestly

The Mexican peso turned negative in the market after the Bank of Mexico rose rates by 50 basis points. Some analysts speculated about risks of a higher rate increase. The Mexican central bank, Banxico, raised the target of the reference rate from 4.75% to 5.25%. 

It is the second time in a row that the central bank raises its benchmark rate by 50 bp. The hike was expected, after the Peso collapsed in the currency market to record low levels against the US dollar, following the results of the US elections. 

The policy response according to Banxico is intended to counter inflationary pressures and inflation expectations. The CPI rose last month above 3.00%, before the devaluation of the local currency. The Board will continue to look for inflation determinants and medium to long term expectations, particularly the transfer into prices of changes in the exchange rate. The central bank mentioned that it does not have a target for the exchange rate and also said that it will look into US and Mexico policy differentials. 

USD/MXN higher 

The pair reached earlier today a 1-week low at 20.12 and then move back above 20.20. After Banxico's decision, it climbed to 20.45 hitting a fresh daily high. 

Volatility continues to decline after soaring last week but it is likely to remain above normal levels. USD/MXN is consolidating on top of 20.00, still closer to record highs levels (21.38) rather than where it was a month ago (18.70).