November 29, 2018 / 8:14 PM / 6 months ago

UPDATE 1-Mexico Central Bank backed 'indispensable' rate hike to counter uncertainty

(Adds central bank comments, background)

MEXICO CITY, Nov 29 (Reuters) - Mexico’s central bank board members thought it was “indispensable” to hike interest rates in order to counter confusion over future policies sparked by the incoming leftist government, meeting minutes showed on Thursday.

Four of five members of the board voted for a 25 basis-point hike on Nov. 15 in their key rate to 8.0 percent, while Deputy Governor Irene Espinosa had called for a 50 basis-point increase, the minutes said.

Mexico’s financial markets were battered in November, and while the central bank members said global volatility was a factor, they also pointed specifically to a series of moves by President-elect Andres Manuel Lopez Obrador and members of his party that could hit public finances.

Lopez Obrador, a leftist who was elected in July, takes office on Saturday.

Most bank board members concurred that Mexican markets had been rocked by Lopez Obrador’s decision to cancel construction of a partly built airport, worries about a shift in policy at the state-run oil company, and uncertainty due to “some legislative projects,” the minutes said.

Unexpected bills from lawmakers in Lopez Obrador’s party to limit bank fees and change laws governing mining rights weakened stocks this month, even though Lopez Obrador’s economic team has not backed the legislation.

Investors and analysts have become concerned Lopez Obrador and his party could pull Mexico away from the orthodox economic policies backed by the central bank.

After the shock to markets in November, all members thought it was “indispensable” to raise rates to ensure inflation would head back to its 3 percent target. The board was unanimous in seeing the need to hike to preserve its credibility.

Most members thought possible policy actions and currency shocks could slow the pace of inflation’s downward trend, and the majority noted the peso would remain under pressure.

Inflation cooled slightly more than expected in early November to 4.56 percent, still well above the bank’s target.

In a report issued Wednesday, the central bank’s chief pleaded for clarity from the incoming government. The report warned new policies could spark a loss of confidence in the Mexican economy. (Reporting by Michael O’Boyle Editing by Frances Kerry)

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