Bank of Mexico likely to maintain hawkish bias

Mid-May inflation in Mexico decelerated to 2.53%, as compared with the consensus expectations of 2.67%. Moreover, the report indicated that certain drivers of core disinflation, which came up from reforms, continue to be in place, noted Scotiabank in a research report.  The major drivers of disinflation were telecom prices, power and low octane gasoline. However, on the upside, there was certain evidence that inflation in service sector is accelerating. Factors contributing to mid-May inflation were restaurants, owner occupied rent and fast food.

Given that the merchandise inflation is at the top half of the central bank’s target rate, where FX-inflation pass –through will be seen, the Bank of Mexico’s board is expected to keep its hawkish bias, said Scotiabank. The Mexican peso’s recent depreciation is likely to set off further rise in rates, added Scotiabank. The central bank might hike rates by 150bps in the next 12 months and by 50bps by September 2016.

The central bank cannot do much to change the behaviour of the peso, barring certain quite aggressive measures. The factors weighing on the currency are expected to have remained in place.