Bank of Mexico likely to hike overnight rate by 25bps in December

The Bank of Mexico had hiked its overnight rate by 50 basis points to 5.25 percent in November, a week after the Mexican peso depreciated heavily following the U.S. election. An immediate tightening after the U.S. election might have given the impression of a financial stability measure, but the rate hike in November gave the following messages.

Firstly that the inflation risk has deteriorated after the peso’s sharp fall. Secondly, the uncertainty around the peso persists, gven t he currency pressure on the most emerging market currencies in general and  the lack of clarity on the U.S. trade policies in particular. These factors imply that the Bank of Mexico would continue to tighten in this cycle.

“We expect Banxico to raise rates by 25bp in December, although we see considerable upside risk of 50bp”, said Societe Generale in a research report.

The Mexican central bank  has hiked rates by 200 basis points year to date, and  the bank would probably hike rates at a measured pace through 2017, given the persistent softness on the growth front.