Mexico interest rates likely to follow U.S. move higher: Sanchez

Manuel Sanchez, Deputy Governor at the Bank of Mexico, speaks during an interview with Reuters at his office in Mexico City

By Alexandra Alper and Michael O’Boyle

MEXICO CITY (Reuters) – Mexico is likely to further raise interest rates since the United States is expected to lift borrowing costs, Mexican Central Bank Deputy Governor Manuel Sanchez said in an interview on Tuesday.

Mexico has hiked its benchmark interest rate four times this year by 200 basis points to 5.25 percent as repeated slumps in the peso currency threatened to fan inflation.

Sanchez suggested that Mexico could follow the U.S. Federal Reserve, which is expected to raise rates in December.

“Very gradually, the United States is understood to be in this process of normalization of monetary policy. It seems more likely that rates in Mexico could keep rising,” Sanchez told Reuters in an interview in Mexico City.

“But I cannot make a specific statement,” he added, when asked about the likelihood of a hike at the Mexican central bank’s next meeting on Dec. 15. The Fed meets the day before.

Sanchez will end his term at the central bank at the end of December.

Mexico’s peso tumbled to a record low following the surprise victory of Republican Donald Trump in the U.S. presidential election and Sanchez said the peso is likely to see further volatility due to concerns about what policies Trump could enact.

During his campaign, Trump threatened to tear up the NAFTA trade deal and impose tariffs on Mexican-made goods.

“A big part of the uncertainty that is reflected in economic variables has to do with the great uncertainty about the economic policies that will be taken by the new administration in the United States,” Sanchez said.

“One can imagine that this volatility could continue for some months more,” he added.

Some fund managers and economists have criticized Mexico’s central bank for appearing to react to big losses in the peso even though consumer price gains have shown no sign of widespread pressure from the currency’s weakness.

But Sanchez insisted that the central bank does not have a target exchange rate. He credited the central bank’s hikes this year with helping to contain inflation expectations.

“The reaction function of the bank has been very consistent. What the bank is seeking is that the depreciation of our currency does not translate into inflation,” Sanchez said. “Communicating that well has been a challenge at the bank.”

“Monetary policy is a science but it is also as much an art and I think that up until now it is working,” he added.

(Additional reporting by Ana Isabel Martinez and Noe Torres; editing by Diane Craft)