The Bank of Mexico is expected to follow the US Fed's move and keep the overnight rate on hold at 3.75% next week. It is likely to issue a relatively dovish statement in terms of growth but slightly more hawkish in terms of inflationary risks. In spite of the unexpected interest rate hike of 50bps on 17 February, the market expects the central bank to remain close to the interest rate path of the US. February's surprise move was clearly undertaken to offset the peso's depreciation.
Some divergence within the central bank's board is expected regarding how the depreciation will impact inflation. The board's hawkish side is expected to raise warnings that the peso's decline will affect inflation as the economy rebounds. Meanwhile, the board's dovish side, which includes the chairman, are expected to imply that the peso's depreciation is contained and will whence fundamentals assert itself. It is also expected to suggest that the pass-through of the depreciation continues to be low.
Furthermore, the dovish side is expected to indicate towards the headwinds from the global economy, implying that the outlook of growth has deteriorated. The inflation report already states that there are no alterations in the inflation outlook in spite of peso's depreciation.
Meanwhile, the hawkish side is expected to imply that the GDP potential is not as high as anticipated and hence the gap will close more rapidly than the dovish side projects. It will caution on the negative impact of peso's depreciation on inflation. Overall, the Mexican central bank is expected to follow the Fed in the policy tightening path with further hiking of interest rate by 75bps in 2016.
