June 21, 2018 / 5:17 AM / 4 months ago

Mexico central bank seen hiking rates to shore up battered peso

MEXICO CITY, June 21 (Reuters) - Mexico’s central bank is expected to raise its benchmark interest rate on Thursday to the highest in more than nine years to counter a slump in the peso and match a U.S. Federal Reserve hike.

Sixteen of 22 analysts surveyed by Reuters expect the Banco de Mexico to raise its main rate by 25 basis points to 7.75 percent.

Six analysts predicted a bigger 50 basis point hike to 8.0 percent, while four estimated the bank will maintain rates at its current 7.50 percent.

Mexico’s peso has fallen around 12 percent since mid-April due to a broad dollar rally, a deadlock in talks around the NAFTA free trade deal with the United States, and nervousness ahead of Mexico’s July 1 presidential election.

“Given the move in the peso in recent weeks, this suggests Banxico might favor a 50 basis point hike,” Capital Economics analyst Edward Glossop wrote in a note.

Policymakers have warned they could raise interest rates if peso weakness stokes inflation.

Sergio Luna at Citigroup unit Banamex stuck to a call for no move on Thursday, noting that inflation had been falling and was running slightly below the central bank’s forecast.

“Mexican authorities could send the signal that their reaction function is associated with exchange rate volatility more than the possible effects of that volatility on inflation,” he wrote in a note to clients.

Annual inflation eased in May to a 17-month low of 4.51 percent.

The Fed raised its reference rate last week and projected a faster pace of hikes in the coming months, with two more this year, compared with its previous estimate of one.

Analysts in favor of a hike said Banxico would likely want to match that move in order to boost the appeal of the peso as U.S. borrowing costs rise.

The Mexican central bank’s interest rate decision will be released at 1 p.m. local time (1800 GMT). (Reporting by Michael O’Boyle)

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