The Bank of Mexico is expected to keep its overnight rate on hold at 3.25% today, mainly in the context of Fed's dovish statement recently. However, the central bank's decision to maintain rates will not be simple. The persistent pressure on peso and domestic factors help rate normalisation, and even if the Bank of Mexico seems to be following the US Fed's monetary stance currently, the stress to raise rates will increase unless domestic demand declines soon.

Depreciation of peso and impact of inflation play an important role in central bank's rate decision. The Bank of Mexico had clearly stated that it will like to keep the spread with the Fed funds rate to attain financial stability. The central bank, given the pressure on the peso, might be tempted to keep the spread at average levels, mainly if the economy returns to its normal course on the inflation and growth fronts. This is one of the main upside risks to the February rate forecast.

"While our current growth forecasts for the US and Mexico suggest upside risk to Banxico's February rate decision, the balance of risk is largely tilted towards the downside this year given that deteriorating global growth sentiment could also hit expectations on the extent of Fed tightening this year. It's likely that the Bank of Mexico makes fewer rate hikes than we expect at the moment (4.25% at year-end or 100bp of hikes in 2016), although this is not our baseline scenario", says Societe Generale.