Mexico Rate Hike and Message

The central bank increased the overnight rate by 50bps, to 5.25%, in line with our expectations. Most economists in a Bloomberg survey were also anticipating an increase of this magnitude, but some were calling for increases of 75bps and 100bps. We think that the bank’s policy statement was prudent and realistic, and applaud that it refrained from overreacting to the increased uncertainty in global and domestic financial markets. The bank’s guidance was largely unchanged relative to the previous statement. The bank will continue to watch closely: (1) the potential pass-through to inflation from changes in the exchange rate; (2) Mexico’s monetary policy stance relative to that in the US; and, (3) the output gap. The bank wrote that it will continue to take the necessary measures to consolidate the efficient convergence of inflation to the 3.0% target. The next monetary policy meeting will take place on 15 December. We think that the bank will likely increase the overnight rate again on that day, particularly if the US Federal Reserve increases the Fed Funds rate one day earlier. The bank wrote that the balance of risks to Mexico’s growth and inflation has worsened since the previous policy meeting. It also wrote that the balance of risks to global growth has also worsened given the possible implementation in the US and other countries of measures that obstruct external trade and foreign investment. On the Mexico US relationship the bank wrote that “it is still difficult to identify the specific elements that will define the economic policies that the US will adopt in its bilateral relationship with Mexico starting in 2017”. According to the bank, annual headline and core inflation will be above 3.0% in 2017 and return to 3.0% by the end of 2018. Previously, the bank had estimated that annual headline and core inflation would be “around” 3.0% next year.