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The Mexican economy continues to grow at a stronger rate in a challenging environment. In the first quarter of this year, the growth accelerated to 2.6 percent year-on-year. Also, the economic growth accelerated further by 0.8 percent as compared to the previous period, partially due to the weak peso. But the rate of growth is not expected to sustain.
While the tight economic exposure towards the US assists Mexico in easing the negative impacts of the huge oil price slump, the outlook has blurred slightly, noted Commerzbank in a research report.
Higher interest rates and the expenditure cuts of the government further pose as downside risks. The structural reforms that were established in 2013-2014 are not making a successful headway. However, the reforms should aid in stimulating investment in the medium-term. The Mexican economy is not expected to regain momentum before 2017.
Following a rise at the start of 2016, consumer price inflation has been moving sideways in recent months. Inflation reached 2.5 percent in June, as compared to the previous year. It continues to move in the lower half of Banxico’s target corridor of 3 percent, plus or minus 1 percent.
Till now, the Mexican peso has not been able to help accelerate inflation any marked extent. Hence, the inflation rate is expected to remain in this band this year and the next year, according to Commerzbank.
The Bank of Mexico is looking to put a cap on the exchange rate against the US dollar. It has thus hiked its rate by 125 basis points to 4.25 percent between December and June.
After raising rates in December by 25 basis points, the Bank of Mexico raised rates by additional 50 basis points in February, when the peso encountered huge losses in line with other emerging market currencies.
“We expect that Banxico will keep counteracting a further significant MXN depreciation via rate hikes. As in February, this might again happen as an emergency hike in an intermediate policy meeting. We expect Banxico to raise the key rate to 4.75 percent by year-end,” added Commerzbank.
