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Bank of Mexico likely to keep rates unchanged throughout 2018 - Commerzbank

Bank of Mexico’s chair Augustin Carstens has left the central bank after nearly eight years as the chair of the central bank. Alejandro Díaz de Leon-Carillo has taken over as the successor. He has been with the central bank since the start of 2017. Mexican inflation, during Carsten’s term of office moved within the inflation corridor of 2 percent to 4 percent. Given the liberalization of prices on the energy market, the inflation has only began to rise noticeably in 2017.

The central bank, worried about the second-round effects and to anchor inflation expectations, responded with interest rate rises. The sharp depreciation of the Mexican peso in connection with Donald Trump’s election as the U.S. president and NAFTA renegotiations also played a role in this decision. Overall, the Bank of Mexico has taken a forward-looking and timely approach in its monetary policy decisions and the central bank has the confidence of the markets, noted Commerzbank in a research report.

This is not expected to change under the new presidency of the central bank. However, markets regard Díaz de Leon as more of a dove. The latest comments by Banxico did not indicate that the central bank will proceed with more rapid rate cuts than the market had anticipated earlier.

During its November rate decision meeting, several board members spoke about doubts regarding the central bank forecast, with anticipates that inflation will decelerate to the Banxico’s target of 3 percent by the end of 2018.

The Mexican peso is likely to be the greatest risk for inflation. Peso is expected to be volatile and under pressure in the quarters ahead, firstly amidst the NAFTA renegotiations. The risk of the negotiations falling has risen in recent weeks. Meanwhile, the Fed is expected to hike its rates three more times in 2018. If the Mexican central bank were to lower its key interest rates at the same time, the Mexican peso would fall.

“We therefore keep our forecast of unchanged rates in Mexico throughout 2018. This should help the peso to hold its ground next year despite the numerous risks”, added Commerzbank.

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