The Mexican peso weakened against the US dollar on Thursday after Banco de México unexpectedly cut its policy rate to 6.25 percent. The currency closed the session at 18.74 pesos per dollar, about 18 centavos weaker than the Wednesday close of 4 November. At one point during the session it had lost nearly 20 centavos.
Why the cut unsettled investors
The cut came as a surprise. Banxico’s monetary policy statement had indicated that no movement was expected at the last meeting of December, and that the board considered the rate would stay in its current range for an extended period.
Carlos López Jones, director of Tendencias Económicas y Financieras, said the narrowing gap between peso and dollar yields was the core problem. “The differential from investing in pesos or dollars is collapsing, which scares off investors, pressures the peso and generates inflationary pressures,” he said.
Inflation questions remain
Banxico has argued that the peso’s decline does not represent an additional source of inflation pressure in Mexico. López Jones’s view runs the other way, linking the currency weakness directly to rising prices.
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Source: Bank of Mexico
