Mexico: central bank likely to hike rates, FX Commission should act - BBVA

According to the Research Department at BBVA, the Bank of Mexico (Banxico) is likely to raise interest rates at their meeting on Thursday. Also, they point out that the Foreign Exchange Commission should act to lower the incentives of shorting the Mexican peso (MXN) .

Key Quotes:

“We expect Banxico to widen the interest rate spread by 50 bp on September 29 Before discussing our monetary policy call, we think that is important to note that the current level of the policy rate is below the estimated neutral level and would remain so even if, as we expect, Banxico leans towards hiking 50 bp on its September 29 meeting. Besides, monetary conditions are close to historical lows and thus, decisively loose. It is important to note this to get a feel of current monetary policy conditions and to question whether the challenging backdrop and risks justify them. That said, we are aware that economic activity does not call for a hike.”

“The growth outlook remains relatively unchanged whereas the inflation outlook has deteriorated somewhat from the previous meeting, mainly driven by higher risks associated with the further weakening of the MXN.”

“Heightened risks arising from peso’s sharp underperfomance should force Banxico to widen the interest rate spread by 50 bp. As in February and June, Banxico will aim to constraint further MXN’s negative differentiation in face of increasing risks as we approach the US election.”

“Although Banxico’s favourite policy tool to address risks during 2016 has been the policy rate, which we think will help to restrain risks going forward, our view is that another action might also be appropriate and timely during this period of increased risks, especially from now until election day in the US.”

“Although the FX Commission is unlikely to target any USDMXN level, it may well consider acting to reduce incentives to maintain speculative positions against the MXN.”