Mexico’s central bank is seen raising its key interest rate by at least 75 basis points on Wednesday if US Republican candidate Donald Trump wins the US election to become the country’s next president, three economists said. Trump, who has threatened to rip up the North American Free Trade Agreement and build a wall between Mexico and the US border, was leading the vote against Democratic rival Hillary Clinton, according to media projections.
Trump’s lead pushed the peso to a record low, falling around 13 per cent and breaking the 20 pesos-per-dollar barrier in its biggest fall since the 1994 Tequila Crisis.
WATCH VIDEO: US Presidential Elections: Fun Facts
Three economists told Reuters they expected the Banco de Mexico to raise its benchmark interest rate by between 75 and 150 basis points in an extraordinary meeting on Wednesday if Trump wins. One of them said the bank could opt for a swap with the US Federal Reserve depending how the peso evolves.
“It is going to be quite difficult to navigate through this,” said Carlos Serrano, an economist at Bancomer in Mexico City. He said the central bank needed to act swiftly.
Serrano thought an emergency hike of at least 100 basis points was needed to help calm markets. If foreign investors start to dump peso-denominated bonds in a stampede for the exits, the central bank could hike again, he said.
Mexico’s peso had already been one of the worst performing major currencies this year and the central bank has hiked interest rates three times this year in a bid to support the currency and keep its weakness from driving up inflation.
The bank last moved in September, when it raised its benchmark rate 50 basis points to 4.75 percent, its highest level since the crisis year of 2009, when the Mexican economy was mired in the global economic crisis.
Interest rate increases and interventions in the market have been Mexico’s main tools to support the peso, which is down around 18 percent so far this year.
The bank was next scheduled to meet to discuss rates on November 17.
The central bank usually only changes its benchmark rate at scheduled policy meetings. In February, it acted without announcing it was having a meeting after a deep peso slump.
Gabriel Casillas, an economist at Banorte, said the peso could suffer for months as the market tries to figure out what Trump could do in office.
“The worst part will be when we know the results and before the inauguration. Because of the uncertainty of what Trump could do, consumers will postpone purchases, companies will postpone investments,” Casillas said.
Casillas thinks a Trump victory could shave up to 0.3 percentage points off Mexico’s gross domestic product this year. But things could look up once Trump is in office and he finds it harder than expected to unwind free trade with Mexico.
“I don’t think Trump will do a lot of the things he said he will do,” he said.
For all the latest India News, download Indian Express App now