Mexico'scentral bank, Banco deMéxico, decided Sept. 29 to raise its benchmark interest rate by 50basis points to 4.75%, citing increased volatility in global financial markets andconcern that further depreciation of the peso could fuel inflation, which inturn could negatively affect economic activity.
Thisis Banxico's third rate hike so far in 2016 after it raised the rate by 50basis points in February and then again by the same amount in June.
Priorto the rate hike, analysts surveyed by Bloomberg were sharply divided over theamount of the increase, with forecasts ranging from 25 to 75 basis points.
Inits decision, Banxico cited higher global market volatility in September and astrong depreciation of the local currency. It also noted growing risks in theglobal economy, including slower-than-expected growth in developed economiesand nervousness ahead of the U.S. elections in November, "which could haveparticularly important consequences for Mexico."
Backat home, the central bank pointed to a continued slowdown in Mexico's domesticeconomic activity following a contraction in the second quarter of 2016, whichwas mainly due to lower private consumption and investment.
Althoughindustrial activity remains weak, some sectors, including manufacturing andservices, have shown recent signs of recovery, but overall the risks facingMexico's economy have increased, Banxico noted.
Evenso, despite the worsening economic outlook, annual inflation in the next fewmonths is expected to be only slightly above 3%, which is the central bank'starget, and remain at this level in 2017.
Thebank said it continues to monitor inflation and the exchange rate, among otherfactors, to determine if another adjustment may be needed in the future.