The central bank of Mexico, Banxico, is expected to make a 25 basis points hike on March 30th to hit a terminal of 11.25%. Economists at TD Securities do not believe that there will be a significant reaction to the MXN as they feel most of the market has already priced in the decision. While there may not be much of a market response, the TD Securities team does expect to see a gradual weakening of the Mexican peso against the US dollar in the coming months, though they still predict levels of USD/MXN at 20.00 by the end of the year, with some uncertainty to the downside.
This cautious outlook for the Mexican economy is not unwarranted. The country is facing several economic challenges at the moment, with a focus on inflation concerns and uncertainties surrounding NAFTA renegotiations appearing to dominate discussions. Mexico has been struggling with rising inflation, and measures like the Banxico hike are intended to curb those pressures. However, even with interventions like the rate hike, economists believe that inflation may surpass its 4% target in the coming months. This could potentially lead to greater economic hardships for the country’s citizens if inflation continues to rise unchecked.
In addition to these inflation concerns, there is also significant chatter around NAFTA renegotiations, which are currently underway. There are concerns that if the US were to pull out of the free trade agreement, the Mexican economy could be hit hard, losing access to one of its largest trading partners. Additionally, some fear that currency manipulation accusations from US President Donald Trump may become an issue in the future, leading to further economic uncertainty.
Given these challenges, the outlook for the Mexican economy is somewhat pessimistic. The TD Securities team expects that the Mexican peso may continue to weaken against the US dollar in the coming months, reflecting ongoing market concerns. However, as mentioned earlier, there is some degree of unpredictability in the outlook, with the downside risks for USD/MXN levels also a possibility.
Despite these challenges, there are still opportunities for Mexico to sustain and grow its economy in the future. For example, as the second-largest economy in Latin America, Mexico has a significant opportunity to become a leader in regional integration efforts. Diversifying its trading relationships to other Latin American countries could help to reduce its overreliance on the US market.
Mexico’s potential in other industries such as manufacturing could also provide a much-needed boost. The country’s existing manufacturing base has helped it to become one of the primary automotive exporters in the world, but it could also expand into other areas, including tech and biotech. These industries may provide much-needed support for the country’s economy as it looks to navigate a challenging economic landscape.
Overall, while economists do not expect a significant market response to the Banxico rate hike decision, there are still significant economic challenges facing Mexico in the coming months. It is vital that policymakers and business leaders take steps to mitigate these challenges and position the country for success in the future. Despite the challenges, there are also opportunities available for Mexico to establish itself as a regional leader and continue to expand its diverse economic base. With the right policies and vision in place, Mexico may be able to navigate these challenges and emerge stronger than ever.
