The central bank of Mexico is expected to raise its benchmark interest rate further in the near term, especially in the context of a tightening move by the United States Federal Reserve. The central bank has increased interest rates by 325 basis points since late 2015, with the policy rate currently at 6.25 percent. This highlights the authorities’ proactive response to increased inflationary pressures and their attempt to better anchor inflation expectations, Fitch Ratings reported.

Fitch has lowered its growth forecasts to 1.5 percent for 2017 and 2.1 percent for 2018, with risks skewed to the downside. The downward adjustment reflects continued economic uncertainty stemming from the negative spillovers for Mexico from possibly increased protectionist US policies. The new US administration has not clarified its approach to many issues that will affect trade, workers’ remittances, and financial flows between the US and Mexico.

It has confirmed its intention to renegotiate the North American Free Trade Agreement (NAFTA). But other statements made during the campaign period, such as taxing or blocking remittances, have been less prominent since the election. Tightening migration controls could increase deportation of undocumented immigrants and affect remittances flows, which in turn could affect consumption. Domestic demand will be weighed down by both consumption and investment.

Higher inflation, constrained credit growth and reduced consumer confidence will conspire against consumption growth. Uncertainty over the possible changes in the US stance over trade and migration policies towards Mexico could negatively affect domestic and foreign investment.