Mexico Central Bank Needs Time to See If Inflation Slowing

Mexico’s central bank needs more time to confirm if inflation is slowing toward target before resuming a monetary easing cycle, Governor Alejandro Diaz de Leon said after the institution left the key interest rate unchanged.

Policy makers want to see if deep shopping discounts akin to Black Friday during November in Latin America’s second-largest economy will subside or persist, Diaz de Leon said in an interview with Bloomberg News late Thursday. The central bank, known as Banxico, will have now two months of data to assess the evolution of prices before its next meeting after only a five-week gap between the past two decisions, he said.

“We will be able to see and confirm at what level inflation will consolidate or what the trend will be,” Diaz de Leon said.

MEXICO REACT: Eroding Opposition Against More Rate Reductions

While the central bank on Thursday kept borrowing costs unchanged at 4.25%, as expected by most economists, the decision was made after a 3-2 split vote by its five-member board, suggesting that a further reduction in early 2021 is possible. After speeding past Banxico’s 4% target ceiling between August and October, inflation slowed precipitously to 3.3% last month in large part because of the extended period of shopping discounts.

Mexico Central Bank Needs Time to See If Inflation Slowing

This seasonal impact may lead to lower prices that linger or, on the contrary, to supply shocks that accelerate inflation, Diaz de Leon said, adding that policy makers want to better identify the trend. “There is a good number in November, yes, but the thinking was to give an additional space to confirm this convergence of inflation toward target,” the governor said.

The bank is facing both the worst economic contraction in nearly a century and resilient consumer prices, which led it to pause a month ago a record easing cycle of 11-straight cuts in borrowing costs.

During the interview, Diaz de Leon also said Mexico’s decision to raise the minimum wage by 15% for 2021 is “very atypical” during a crisis, but that it wasn’t clear what impact it would have on inflation because of the current uncertainty regarding the economy. Nevertheless, the wage hike could be included as part of pressure on company costs, which is one of the risks to higher inflation listed in the statement accompanying the rate decision, the governor said.

Diaz de Leon thanked lawmakers for delaying a bill that would’ve forced Banxico to buy dollars from banks that can’t unload them elsewhere.

He said that the central bank’s strategy in upcoming discussions over the bill will be to focus on finding alternatives to resolve the concerns of migrants and others who receive dollars in cash “without affecting, or by maintaining, the financial integrity and autonomy of the bank.”

©2020 Bloomberg L.P.

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