Banxico likely to hike key rate by end-2016

Mexico’s consumer price inflation accelerated during the start of 2016 and has rather been trending sideways in recent times. It came in at 2.7 percent in August, as compared to the same period in the previous year, thereby still moving in the lower half of the Banxico’s target corridor of 2 percent to 4 percent. So far, the Mexican peso has not been able to help accelerate inflation to any marked extent. Hence, inflation is likely to stay quite within this band this year and next, said Commerzbank in a research note.

Meanwhile, the Mexcian central bank, Bank of Mexico’s, monetary policy is apparently looking to put a cap on the crucial exchange rate against the US dollar in order to offset inflation risks early on. Until now, the central bank has raised its key interest rate by 125 basis points to 4.25 percent between December and June.

“The fact that not even the Brexit and the elevated uncertainty it caused in the markets dissuaded Banxico from taking action in June – independent of the Fed – demonstrates its resolve”, noted Commerzbank.

However, in the view of the weaker growth outlook, it might enter into a dilemma. The Bank of Mexico is expected to hike its key rate to 4.5 percent by the end of 2016, added Commerzbank.