Mexico central bank signals ‘prudent’ policy amid NAFTA risks

2017 10 12T142605Z 1 LYNXMPED9B17S RTROPTP 0 MEXICO ECONOMY 1 - Mexico central bank signals ‘prudent’ policy amid NAFTA risks
FILE PHOTO: Mexican pesos are seen in this picture illustration August 3, 2017. REUTERS/Edgard Garrido/Illustration/File Photo

October 12, 2017

MEXICO CITY (Reuters) – Mexico’s central bank is likely to maintain a prudent monetary policy stance due to “adverse scenarios” in Mexican-U.S. ties, which could heighten risks for economic growth and the peso, most of the bank’s board members said in minutes published on Thursday.

Mexican, Canadian and U.S. trade talks were under way near Washington on Thursday to re-negotiate the North American Free Trade Agreement (NAFTA).

Mexico’s peso has shed nearly 3 percent since last Tuesday on concerns the talks could founder on U.S. demands that Mexico considers a dealbreaker.

“Clearly the real exchange rate depreciation that we have experienced is clearly a reflection of the uncertainty regarding the future of NAFTA,” central bank Deputy Governor Alejandro Diaz de Leon said at an event in Washington.

Analysts doubt the central bank could move anytime soon to cut interest rates from their highest since early 2009 due to concerns that lower yields on local debt could exacerbate peso weakness.

Last month, Mexico’s central bank unanimously decided to leave unchanged its benchmark rate at 7.0 percent <MXCBIR=ECI>.

The minutes released on Thursday showed a majority of board members said uncertainty over NAFTA talks and the 2018 Mexican presidential election, could affect the peso exchange rate.

“The balance of risks to growth has deteriorated, particularly due to the perception that adverse scenarios related to the bilateral relationship between Mexico and the United States could materialize,” the minutes said.

As a result, the bank said it should be ready to maintain a “prudent” monetary policy position.

U.S. President Donald Trump has criticized NAFTA for luring U.S. manufacturing jobs to low-wage Mexico and has vowed to quit the pact or revise it to reduce his country’s $64 billion trade deficit with its southern neighbor.

The 23-year old NAFTA agreement has become a central tenet of Mexico’s export-led economy.

The central bank minutes show the concern board members had that an end to the pact could negatively impact large parts of the economy.

However, minutes from the Sept. 28 meeting showed that most board members thought risks to growth and inflation were worse than before. Most said uncertainty around NAFTA and Mexican presidential elections could affect the peso in the short term.

Nonetheless, the bank said it sees annual inflation trending toward its 3 percent objective by the end of 2018. The bank said recent earthquakes could result in price rises in some products, but that they would be temporary.

(Reporting by Mexico City Newsroom and Dion Rabouin in New York; Writing by Gabriel Stargardter; Editing by Frank Jack Daniel and W Simon)

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