Mexico's central bank to weigh risk of currency war in interest rate decision


By Abraham Gonzalez

MEXICO CITY, Aug 13 (Reuters) - When the Bank of Mexico's board meets on Thursday to set the key interest rate in Latin America's second-largest economy, board members will have to weigh an unexpected threat in their decision making: the possibility of a U.S.-China currency war.

A yearlong U.S.-China trade war boiled over last week as Washington accused Beijing of manipulating its currency after China let the yuan drop to its lowest point in more than a decade.

"There is a lot of speculation about this board meeting, and the exchange rate will significantly influence Banxico's decision," said James Salazar, analyst at CI Banco, referring to the Bank of Mexico.

"If the exchange rate is under a lot of pressure when they meet, above 19.80 or 20 pesos (to the dollar)," the bank may wait until its September monetary policy meeting to cut rates, he added.

On Tuesday morning, the peso recouped some of its earlier losses to climb 0.7% against the dollar.

In a note to clients, economists at bank Ve Por Mas forecast that the Mexican central bank would leave rates on hold due to increased uncertainty and the peso's recent wobble.

Views on the upcoming monetary policy decision are divided.

The consensus forecast in a Reuters poll of economists was for the bank to hold its benchmark interest rate steady at 8.25%, though analysts have been increasingly bracing for a possible rate cut to lift Mexico's sluggish economy.

"It will be a close call, but on balance, we think the central bank will shrug off the recent weakness in the peso and cut rates by 25 (basis points)," Edward Glossop, Latin America economist for Capital Economics, said in a client note.

The bank's five-strong board struck a cautious tone at its last monetary policy meeting on June 27. Still, one member voted for a rate cut and another said that if inflation continues to soften, cuts would be needed relatively soon.

This article appears in: Politics , Stocks , World Markets , Economy

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