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Last month's decision to raise Mexico's benchmark interest rate 50 basis points to 4.75% was unanimous, as policy board members moved to address multiple risks to inflation, according to the minutes of the central bank's latest meeting, released Thursday.
"[The board] seeks to counteract inflationary pressures and keep inflation estimates well-anchored," read the minutes. They added that the hike is not meant to be the start of a tightening cycle, even though this is the fourth such increase since December 2015 – now totaling 175 basis points.
During the September 29 discussion, board members tied inflation to concerns over external issues such as persistently low oil prices and the impending US elections as well as internal matters – chiefly the peso depreciation, public debt and the deficit – in their vote to tighten monetary policy.
The board acknowledged that annual inflation was still within the current target range of 1-3%, though it would likely rise to just above 3% by year-end and stay near the target range in 2017. Nevertheless, members agreed that the existing uncertainty stemming from these concerns, at least in the short term, was enough to make a move immediately.
Beyond inflation, a majority of the central bankers also saw deterioration in growth, noting that current aggregate demand is not sufficient for price levels to increase growth, as seen in the drop in GDP growth for Q2 this year, with consumers hitting the brakes on purchases.
The board looked repeatedly at US-based factors affecting Mexico, considering it likely that the US Federal Reserve will raise rates this year after a split vote kept rates steady in September, and suggesting that the results of the US presidential race could generate a slowdown in US GDP growth.
The minutes repeated concerns about the US election, showing the negative correlation between Trump's chances of winning and the dollar-peso exchange rate, with the board unanimously expressing concern over that outcome.
Bank governor Agustín Carstens has openly raised alarms over the election, saying a win by Republican candidate Donald Trump would be far more detrimental to Mexico than his opponent Hillary Clinton - even stating in a radio interview that a Trump win would be equivalent to a category-five hurricane for the Mexican economy.
Carstens added on Wednesday in another radio interview that market volatility could calm if the Trump issue "resolves itself," noting that the current view of the election - where Clinton has taken a strong, if not unbeatable, lead in polls this week, less than a month before the November 8 vote.
Looking at the public debt issue, the minutes cited one member's comments who "observed persistent and elevated financial requirements from the public sector and accelerated growth in public debt versus GDP in recent years."
Most of the members agreed that, as a consequence, "certain indications of risk premiums have been increasing. One said, "These are even higher than those in other economies with the same credit rating."
Concerns over growing public debt have led S&P and Moody's to shift the outlook on Mexican debt to negative from stable this year and for Fitch to urge austerity in the 2017 budget. Mexico's finance ministry responded to those concerns with its current proposal that cuts 239.7bn pesos (US$12.65bn) in an effort to produce a primary surplus for the first time since 2008 – to the broad approval of analysts.