Banxico Unlikely to Hike Next Week, Statement to Be Hawkish

Banxico new Governor Alejandro Diaz de Leon is expected to keep the benchmark interest rate unchanged at its monetary policy meeting, whichis scheduled for December 14 at 19:00GMT. Since his appointment a week ago the new governor has been caught up stressing that he would keep up monetary policy setting continuity and stability along with central bank’s autonomy.
As expected, Banxico remained on hold at its last policy meeting hung on November 9, keeping the benchmark interest rate at 7.00% in a unanimous decision. We think that Banxico will not change the policy next week despite Federal Reserve’s likely 25 basis points interest rate hike a day before, not least because the board only has 4 members for now.
We believe that the new Governor is well aware of the NAFTA uncertainties and its impact on the Mexican peso. Alejandro in its latest speech said that it is difficult to think that all possible scenarios are incorporated in the exchange rate, as the range of possible outcomes is wide. On the other hand, the central bank will also consider the negative impact of the higher interest rate as NAFTA angst is impacting the country’s investment and the household spending growth has slowed in recent months. Therefore, we foresee that rate hike next week is probably off the table.
Moreover, in an interview with the Wall Street Journal, Alejandro said that all options were on the table on December 14 policy meeting and the Banxico would be ‘extremely prudent’ and data dependent, the November CPI release along with the Fed’s decision the key factors.
On the currency front, we still see the currency weaken in the medium-term range, as NAFTA risks and domestic politics will continue to weigh. So far this year, the Mexican peso has strengthened over 10%, currently trading at $18.62 by 12:30GMT.

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