Mexico Increases Rates to Rein in Inflation

Mexico’s central bank pushed interest rates higher Tuesday for the third time this year in an unexpected move aimed at pushing inflation down to within its target range.

The central bank said it raised its money market “short” to 37 million pesos per day from 33 million pesos. An increase in the short reduces overnight lending to banks and indirectly forces up interest rates.

The decision, which took Mexican markets by surprise, came after the central bank left the short untouched at a twice-monthly meeting Friday, but warned that it would remain “vigilant” to rein inflation back to under its upper limit of 4%.

Inflation on a 12-month basis stood at 4.12% in mid-April and had been considered relatively benign by most economists, but the central bank said a recent dive in short-term rates on Mexican debt had endangered price stability.

“Everybody underestimated the ability of the central bank to make decisions between meetings,” said Edgar Camargo, an economist at Bank of America in Mexico City. “The market had basically challenged the central bank and they responded.”

The rate for benchmark one-day government T-bills had fallen to 5.47% at Monday’s close from 6% as recently as Thursday.

The central bank said a “marked reduction” in rates was “incompatible” with its stance on monetary policy.

Economists said the central bank appeared to be preparing the market for an increase in U.S. interest rates later this year. A large gap between Mexico and U.S. rates could have damaged the Mexican economy, they said.