WASHINGTON: The Bank of Mexico has confirmed that its recent rise in the interest rate was a one-off move and of a pre-emptive nature. The central bank, in its Q4 2015 inflation report has adjusted the 2016 GDP forecast to 2.0-3.0% y/y from the earlier estimate of 2.5-3.5%. It has also revised its inflation forecast for 2017 to 2.5%-3.5% from the earlier report’s 3.0-4.0%.
For a temporary period, the central bank’s board expects inflation to be more than 3% because of seasonal factors, especially in Q2 and Q3 and end the year near 3%. Core inflation is also expected to accelerate slowly and reach 3% by the end of 2016. The recent rise inflation is because of higher vegetable and fruit prices and base effects.
Meanwhile, the weakness in labor market is likely to decline gradually, while the output gap is expected to remain negative; however, headwinds still come in the way of economic growth. Mexico has recorded modest economic growth, which is mainly due to consumption, whereas growth in total employment continues. However, investment is inclined on the negative side. According to the central bank board, there are certain risks to growth on the downside, such as continued low oil prices, weaker US industrial growth and higher financial markets volatility.
In such a scenario, the external environment in 2016 is likely to be complex. Also, the central bank’s report contains an analysis on the manufacturing exports’ low sensitivity to real exchange decline in the short term. If the US industrial growth does not weaken further, the possible impulse from the recent depreciation should be seen only later.
“We maintain a 2.3% GDP forecast for 2016, but this number does not incorporate the fact that oil production will decline 6% this year, which might shave another 40bp off of this figure, putting growth close to 2.0%. We expect Banxico to adjust its forecast once again later in the year”, says Barclays.
Even if external factors such as EM risk and oil prices are expected to drive the Mexican peso, the central bank board has mentioned explicitly that the spread with the US rate will not be compressed. It is still credible to follow the US Fed in the short term.
