Mexico likely to hike rates

Mexico's central bank monetary policy committee will meet on Thursday to decide whether to implement a rate hike, with Goldman Sachs saying a raise is highly likely.

The US investment bank places the odds of a rate hike at 65%, and potentially as high as 50 basis points if the peso remains under pressure and trading volume is high leading up to the meeting.

"A rate hike would complement the spending cuts announced Friday by the fiscal authorities, and with regards to policy instrument choice (higher rates versus intervention) would also jibe with the revealed lack of enthusiasm for direct FX market intervention at this juncture," said GS.

As the market is already pricing in a 25bp move, GS says failing to deliver could unsettle the economy.

Conversely, Brexit could lead the core G4 central banks to adopt a more accommodative policy, and would likely prevent Mexico from opting for a large front-loaded interest rate shock strategy.

While the inflation picture in Mexico remains relatively stable, core and freely determined price inflation accelerated from 2.4% at the end of 2015 to current levels of 3.0%.

The GS report says moderate rate hikes will in all likelihood protect the capital account and not have a significant detrimental impact on the economy.

A failure to take proactive measures to stabilize the Mexican currency would add more pressure on core inflation, says GS, particularly if shrinking margins make it difficult for retailers to continue to accommodate higher import costs.