Tight monetary policy to strengthen Mexican peso

Significance

Banxico justified the move as an attempt to curb inflationary expectations and eventually reduce inflation. It should also boost the peso, making the currency more attractive to investors. Partly thanks to the tighter monetary policy and a programme of foreign-exchange hedge auctions, the peso has strengthened significantly since January 19, the day before US President Donald Trump took office. Also on May 18, the US government sent a letter to Congress to begin officially a 90-day consultation period required before renegotiation of the North American Free Trade Agreement (NAFTA) can start.

Impacts

• Tight monetary policy looks likely to pull the Mexican economy through the turbulence of Trump’s first year.
• Any US government requests for protectionist measures in NAFTA will rattle the peso.
• The Central Bank expects inflation to fall back towards the target range by 2018.