Timing of Fed tightening may influence Banxico decision

The Bank of Mexico has kept its policy rate unchanged since mid-2014 at its lowest level of 3.0%.

Societe Generale states the timing of the beginning of the Fed's tightening cycle, which could increase financial market volatility and put further pressure on the peso, necessitating an adequate policy response by Banxico. Therefore, the Fed's rate change may influence the Banxico decision.

While the pass-through effect of MXN depreciation on inflation is estimated to be quite low, Deputy Governor Javier Guzman's recent communication suggested that this is largely a grey area, with uncertainty surrounding the extent of additional pressure on MXN and its ultimate impact on inflation. 

Societe Generale argues, "What this does imply, however, is that Banxico could decide to closely follow the Fed's actions in light of the uncertainty. Accordingly, Banxico has revised its policy meeting dates so that they come soon after FOMC meetings. Therefore, the first Fed rate hike at the September meeting, which presents upside risk to the expectation of first rate hike in Mexico in Q1 16; i.e. Banxico could raise rates earlier than expected."