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Mexico hikes interest rate amid uncertainty

© AFP | The strong lead in polls by Mexico's leftist presidential candidate Andres Manuel Lopez Obrador, combined with fears over the future of NAFTA, is adding to market uncertainty ahead of the July 1 election

MEXICO CITY (AFP) - 

Mexico's central bank raised its key interest rate Thursday to 7.75 percent, citing a drop in the peso and uncertainty over upcoming elections and trade negotiations with the United States.

The hike, by 0.25 percentage points, was largely expected by markets after the peso crossed the threshold of 20 to the dollar earlier this month.

"Since our last monetary policy decision, the peso has depreciated further and shown increased volatility," the Bank of Mexico said in a statement.

It said the factors behind the volatility included a lack of progress in efforts to renegotiate the North American Free Trade Agreement (NAFTA) with the United States and Canada, as well as uncertainty around Mexico's July 1 elections.

Talks on updating NAFTA have stalled over demands by US President Donald Trump's administration for more protections for the American auto industry and a five-year "sunset clause" to the agreement.

Markets are also uneasy over the presidential election, in which opinion polls give fiery leftist Andres Manuel Lopez Obrador a double-digit lead.

Mexico's inflation rate is coming under control after spiking last year. It currently stands at 4.51 percent, and the central bank expects it to return to the target range of two to four percent next year.

But inflation risks remain, and the peso has now become a headache for the bank.

"Everything hinges on the currency," said consulting firm Capital Economics.

"If the peso comes under pressure from either political concerns following next month's election or worries about the direction of NAFTA negotiations, it's clear... that policymakers will tighten further."

© 2018 AFP