Mexicananalysts say the central bank, Bancode México, could raise its benchmark interest rate further in the comingmonths if the local currency experiences further devaluation, which would likelypressure inflation, El Financiero reported.
Bancode México, or Banxico, has already raised the benchmark rate twice in 2016, withits most recent actionon June 30 when it hiked the rate 50 basis points to 4.25%, citing the potentialimpact of global economic conditions on inflation. It previously the rate to 3.75% in February.
Banxicowill likely look to avoid a decoupling between inflation expectations and interestrates in the second half of 2016, the report said, citing Banco Ve por Más economist Mariana Ramírez.
However,the exchange rate is affected by external factors beyond the central bank's control,she noted.
Banxicohas succeeded in keeping inflation below its target of 3%, partly by raising interestrates in recent months, but exchange rate volatility is expected to continue, saidGabriela Siller, an analyst at BancoBase, according to the report.
In thecentral bank's minutes from its last monetary policy meeting on June 30, which werereleased July 14, it said the Mexican peso had depreciated 11.4% since its previousmeeting, which was mainly due to risk aversion in international financial markets.
Uncertaintysurrounding the electoral process in the U.S. and the referendum result in the U.K.has also contributed tothe currency's depreciation, the bank noted.
Domestically,one member of the central bank's board said the increase in Mexico's deficit couldpressure the exchange rate going forward, which could affect prices in the localeconomy.