Banxico to remain on hold until Q1 16

The Bank of Mexico kept its policy rate unchanged at 3.0% at its September board meeting. Meanwhile, forward guidance on the conduct of its monetary policy was also kept unchanged while noticing no changes to the balance of risk to either inflation or growth compared with the last meeting. Things have changed somewhat since then. Market sentiment has tilted towards no Fed rate hike this year - particularly since the release of September labour market data. Also, following recent releases including the US labour data, growth sentiment has also diminished in both the US and Mexico. 

The Mexican economy is less likely to see its substantial output gap falling anytime soon. With the labour market slack persisting and the inflation outlook remaining conducive for continued monetary accommodation (although inflation will revert from current lows starting in January 2016), the Fed's decision seems to be the only factor that could push the Banxico towards raising the Overnight rate in order to maintain the spread with the Fed Funds rate. 

There is a 55% probability of Fed tightening beginning in March and a 70% probability of that happening before end-Q2 16. Both of these scenarios remain consistent with the call for no rate hike by Banxico this year and the beginning of a tightening cycle in Q1 16. However, there is an increasing downside risk that Banxico tightening will not begin in Q1 16 and that the extent of tightening will be considerably smaller than the expectation of a 200bp rate hike in 2016. We will have greater knowledge about this after the Banxico board meeting this week.