It’s all About Expectations:
The Mexican central bank surprised markets yesterday by implementing a 50 bps increase on its benchmark interest rate, from 3.25 percent to 3.75 percent, saying that it was concerned that inflation expectations could de-anchor due to the strong depreciation of the Mexican peso over the past year and a half.
Consequences for Economic Activity:
We do not believe that this move will have serious consequences for Mexican economic activity or at least more serious than the strong tightening fiscal policy is already having due to the collapse of the price of petroleum. The central bank’s only concern is inflation and thus it knows that at some point in time the strong depreciation of the peso will start affecting expectations and thus the rate of inflation. Furthermore, we already have a weaker Mexican economy in our forecast for 2016 so for now the recent tightening will not affect our view on the economy. However, if the central bank continues with its campaign, the economy will start feeling the effects.
Read the complete commentary here: mexico-central-bank-20160218