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Why Banco de Mexico Raised Its Policy Rate by 50 Basis Points

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Mar. 16 2016, Published 2:59 p.m. ET

Cushioning the peso’s fall

On February 17, 2016, the Central bank of Mexico decided to hike its benchmark rate by 50 basis points to 3.75%. Inflation in the economy rose to 2.6% in January 2016 from 2.1% in December 2015.

The bank’s move should help to pull back inflation. It should also help to cushion the Mexican peso’s fall amid the global (ACWI) (VT) currency wars.

The bank also intervened in the foreign exchange market to support the falling Mexican peso. The move required a major policy shift. The bank sold US dollars to cushion the peso’s fall.

Such currency measures helped the Mexican peso to reverse its trend. From over 19 pesos to one dollar before the rate hike, the currency is already down to 17.9 pesos to one dollar as of March 9, 2016.

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Consumerism to drive growth in Mexico

Consumerism is another factor supporting growth in Mexico. With the country’s median age at just 27.6 years according to the Central Intelligence Agency’s 2015 estimate, Mexico boasts demographics favoring consumerism and growth.

Multinational consumer companies such as Coca-Cola (KO), Proctor & Gamble (PG), and Unilever (UL) have been operating in Mexico for some time now.

The real estate renaissance in Mexico is another factor favoring investment flow toward the region. The ascent of local pension capital should aid real estate market growth in the economy. Low interest rates, stable growth, and low inflation are other factors that stand to catalyze this Latin American economy’s recovery. The iShares MSCI Mexico Capped ETF (EWW) invests in Mexican equity.

Mexico is the sixth-largest oil producer in the world. With the commodity price slump, consumer-driven growth has become even more imperative to Mexico’s case.

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