Mexico May Get a Big Interest Rate Hike After the Peso’s Trump Tumble

November 17, 2016, 11:46 AM UTC
A man "takes energy" with a Mexican Peso
TEOTIHUACAN, MEXICO: A man "takes energy" with a Mexican Peso bill on the top of the Sun Pyramid in Teotihuacan, Mexico, during the spring equinox 21 March 2006. Since yesterday more than one million people visited the archaeological sites in Mexico to be "charged in energy" during the equinox, which arrived Monday at 12:26 local time (18:26 GMT). AFP PHOTO/Alfredo ESTRELLA (Photo credit should read ALFREDO ESTRELLA/AFP/Getty Images)

Mexico‘s central bank could deliver a bigger-than-expected interest rate hike on Thursday in a bid to support the peso after the currency was hammered to a record low by last week’s election of Donald Trump as U.S. president.

The central bank had been expected to raise its benchmark interest rate by 50 basis points to 5.25%, according to the median of a Reuters poll of 15 analysts on Monday.

By Tuesday, the market was betting on a 75-basis-point hike, according to the results of thec entral bank‘s weekly debt auction. The central bank will issue its decision on Thursday at 1 p.m. (19:00 GMT)

The peso was driven past 20 pesos per dollar last week, its biggest two-day loss since a 1995 devaluation. The currency ended down nearly 9% on the week and its deep slump could fan inflation higher.

“The central bank needs to send a strong message,” said Carlos Serrano, an economist at BBVA Bancomer, who is expecting a 75-basis-point hike.

“First, just to minimize the possibility of capital outflows, but they also need to do it to maintain inflationary expectations,” he said.

Eleven analysts in Monday’s poll expected a half-percentage-point increase, three saw a 75-basis-point hike and one bank expected a full percentage-point increase.

The peso had been pressured since mid-August whenever Trump gained ground in opinion polls. The Republican candidate threatened to unwind a free trade deal with Mexico and block the money sent home by migrants to pay for a border wall.

The central bank has lifted borrowing costs three times already this year in half-percentage-point hikes in a bid to bolster the peso, which has also been hurt by concerns about rising government debt and a bailout of state oil firm Pemex.

Mexico‘s annual inflation rate rose past the central bank‘s 3% target level in October for the first time in over a year and a half.

Although the peso saw big losses earlier in the year, Serrano said there was now a greater risk that inflation could pick up pace after Trump‘s win shifted the entire model analysts had been using to look at the peso.

“Before, the expectation was that the peso’s weakness was something transitory,” Serrano said. “Economic agents now think we have reached a new equilibrium,” above 20 per dollar, he said.