Bank of Mexico likely to hike key interest rate by 50 bps in February

The Bank of Mexico is likely to hike its key interest rate on Thursday due to the worsening inflation outlook. According to a Societe Generale research report, the Banxico is expected to raise the overnight rate by 50 basis points. In December, the central bank had hiked the overnight rate by 50 bps to 5.75 percent in order to alleviate the pressure on the Mexican peso.

The peso has fallen by another 6 percent since then through 19 January, before stabilizing around the mid-December level. With the ongoing uncertainty about trade and inflows from the U.S., the Mexican peso continues to be extremely vulnerable. Also there is a greater change of peso’s decline rather than an appreciation under the current circumstances, stated Societe Generale.

In the meantime, with peso declining and Pemex-implemented rise in gasoline prices, inflation is expected to have accelerated in January to 4.90 percent year-on-year. Inflation is likely to accelerate further and is anticipated to peak at around 5.5 percent in the third quarter. However, given the path of the peso and uncertainty regarding the exact pass-through, there is certain upside risk to the projection, stated Societe Generale.

In any case, with the factors mentioned above and the expected further tightening by the U.S. Fed, the Mexican central bank will be hiking the overnight rates by additional 200 basis points this year to 7.75 percent, added Societe Generale. The worsening growth outlook might urge some to think about the feasibility of such steep rate rises in 2017, the central bank would no choice but to hike rates in order to avert financial instability, added Societe Generale.