The Mexican economy continues to grow at a stronger rate amidst a challenging environment. The nation’s GDP grew 2.8% y/y in the first quarter of 2016. The first estimates noted that the Mexican economy grew 0.8% as compared to the earlier period. However, the pace of growth is not expected to be sustained. Although the Mexican economy has eased the negative impacts of falling oil prices due to economic exposure towards the US, the economic outlook has slightly dampened.

Additional downside factors include the rising of the target rates and the government’s expenditure cuts that are a drag on private consumption. Mexico had introduced structural reforms in 2013/14 and they are making just a timid progress. However, they should assist in stimulating investment in the medium term. The Mexican economy is not expected to gain back its momentum before 2017, said Commerzbank in a research report.

Meanwhile, the Bank of Mexico is looking to steady the peso against the US dollar. The central bank had hiked rates in December to 3.25%. It further hiked by 50 bp in February when the peso depreciated sharply. This has eased the pressure on the currency. The Bank of Mexico is expected to closely observe the exchange rate that is majorly driven by the oil price. The central bank is likely to keep the rates unchanged for now, added Commerzbank.

The Banxico is unlikely to raise rates before the end of 2016. The country’s consumer price inflation, since the start of 2016, has been on an upside trend. Inflation accelerated last month to 2.5% as compared to the same period in 2015. Hence the inflation has moved in the lower half of Bank of Mexico’s target corridor of 3%, plus or minus 1%.

“We expect the inflation rate to remain well within this band in 2016 und 2017”, noted Commerzbank.