Bank of Mexico likely to hike interest rate by 50 bps in November

[The article has been edited to attribute the quotation to Societe Generale]

The Bank of Mexico preferred to wait and watch the entire effect on the peso after the U.S. election results were announced last week, rather than react rapidly by hiking rates at the urgently called press conference that was held of the day of the election results were released. Admittedly, the Mexican peso has stabilized slightly in the subsequent days as market nerves were eased by the absence of any immediate and related policy statements from President-elect Trump or his team, noted Societe Generale in a research note.

However, this calm is not expected to stay for long. Significantly, the long-term path of the Mexican peso might be severely affected if U.S. trade policies on Mexico or NAFTA were to change considerably. This expectation might keep the market on tenterhooks in the near term.

“As an immediate policy response, we expect Banxico to raise rates by 50bp at its November board meeting, followed by another 25bp rate hike in December (to align with the likely Fed hike)”, stated Societe Generale.​

The deterioration risk in the trade relationship is not expected to go away and there is quite a possibility that the long-term path of the Mexico-U.S. trade would be impacted by alterations in the U.S. policy in t he course of next few years. This is expected to impact Mexico’s trade, growth, investment and other macro parameters adversely.

Given this scenario, the pressure on peso is likely to continue in the coming few quarters as additional information comes in. This is expected to impact inflationary pressure more than was anticipated earlier, and consequently, a stronger response would be needed from the central bank.

Meanwhile, recent growth indicators imply that the economy is expanding quite below trend and slowing down further. Unless the U.S. economy accelerates from here, a further deceleration is likely in the Mexican economy.

The USD/MXN pair was trading at 20.2364 at around 07.08 GMT.