Bank of Mexico likely to keep policy rate on hold

Mexico’s inflation in the first quarter surprisingly slowed down. However, with the base effect, inflation is likely to normalize in 2016 and reach the central bank’s target rate of 3% on average, according to Societe Generale. It might even surpass the target rate by the end of 2016. With the prices weakening recently, along with rise of the Mexican peso in the past few months, it signifies that the Bank of Mexico is not expected to tighten policy in Q2, stated Societe Generale.

The increase in oil prices and depreciation of the US dollar has benefitted the Mexican peso. This suggests that the central bank is expected to take gradual steps on the rate front. Hence, the Bank of Mexico’s board is likely to maintain its policy rate at 3.75% in May, added Societe Generale.

But the Mexican economy continues to expand closer to its trend rate. This, along with the current normalization of inflation will ultimately aid the central bank to raise rates later in 2016. Furthermore, concerns regarding inflation and domestic growth did not drive the central bank’s recent decisions. The US Fed’s stance will continue to be important to MXN’s movement and the Bank of Mexico’s rate decisions, if the domestic scenario does not decline sharply, noted Societe Generale.

“We still see the Banxico raising rates by a further 50bp this year (+25bp each in Q3 and Q4). Our year-end rate forecast remains unchanged at 4.25%”, said Societe Generale.