Mexican experts see higher inflation, weaker peso in 2017

Rising uncertainty about the economy and a spike in fuel prices have generated a marked shift in the outlook for Mexico's key macroeconomic indicators with the latest central bank private sector poll, out Wednesday.

In the bank's first survey of 2017, economists produced an average forecast of 5.25% inflation by year-end, well above the central bank's 2-4% target range and a considerable adjustment from the 3.41% forecast in the previous poll conducted in mid-December.

Gasoline prices rose 15-20% at the start of January and another 8% hike is expected to hit Friday, all steps the government is taking this year to remove subsidies on fuel prices and move towards floating, internationally driven rates.

Halfway through January, prices for many basic goods were already surging, moving to 4.78% in the highest mid-month jump (1.51%) seen since 1999.

The actions of now-US President Donald Trump, both before his inauguration January 20 and after, are broadly reflected in the results, particularly for the peso, which plunged after US automaker Ford cancelled a planned US$1.6bn assembly plant in Mexico on January 3. The decision was seen as a direct result of pressure from Trump to move operations to the US.

Trump's twitter-based assaults, were similarly launched against other auto makers in the following weeks, including Toyota, GM and BMW, helping drive the rate close to 22 pesos to the US dollar; however, the peso has since bounced back considerably, trading at roughly 20.8:1 Wednesday at mid-day.

The central bank poll with analysts and economist in the private sector, taken in the final days of January, projects that the peso will see sustained weakness in 2017, closing at 21.70:1 by year-end, as an average estimate, opposed to the 21.21:1 prediction seen in the previous poll.

US monetary policy, peso depreciation, booming inflation, and economic uncertainty, made even more emphatic by the very public spat between US and Mexico over trade last week, have further spurred experts to raise expectations for interest rate hikes, with the average key rate forecast for year-end 2017 now at 7.00%, well above the 5.75% prediction in the mid-December forecast.

Though 2017 GDP forecasts changed little in the poll, falling slightly to an average of 1.6% from 1.7%, the outlook does reflect Trump's presidency, where most forecasts lowered projections immediately after the November 8 election.

The Mexican economy is now expected to have expanded 2.3% in 2016, based on the government's first initial estimate.