Mexico’s Above-Target Inflation Signals Rate Hike This Week

(Bloomberg) -- Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

Mexico’s annual inflation remained far above the central bank’s target ceiling in July, keeping pressure on board members to continue raising interest rates at Thursday’s monetary policy decision.

Consumer prices jumped 5.81% compared to a year earlier, slightly less than the 5.88% rise seen in June but more than economists’ median estimate for a 5.78% increase, the national statistics institute reported Monday. Monthly inflation accelerated to 0.59%, compared to the 0.53% reading recorded in June.

Mexico’s central bank, known as Banxico, hiked its key interest rate by a quarter point to 4.25% in its last meeting, in June. The decision split board members, some of whom called the inflationary pressures transitory. The majority was concerned about continuing supply-chain disruptions and the persistence of inflation. Banxico targets inflation at 3%, plus or minus one percentage point.

“Core inflation keeps trending up and headline inflation remains well above Banxico’s target, so a hike this Thursday is highly likely. We expect a 25 basis point hike with upside risks,” said Carlos Capistran, head of Mexico and Canada economics at Bank of America.

Since the hike, swaps markets have been pricing around 100 basis points in further tightening this year. Economists surveyed by Citibanamex expect 75 basis points of hikes.

What Bloomberg Economics Says

“Lower headline inflation in July is mainly due to base effects and provides little relief for Mexico. Supply shocks and recovering domestic demand should keep pressure on prices. High headline inflation and accelerating core prices risk contaminating inflation expectations. The results support our expectation for the central bank maintain a cautious tone and increase interest rates again at Thursday’s policy meeting.”

-- Felipe Hernandez, Latin America economist

To read more, click here.

President Andres Manuel Lopez Obrador has proposed government actions to lower the price of tortillas, a staple of the Mexican diet, and announced a new state-run liquefied petroleum gas provider to generate competition and bring down households’ costs.

Core prices, which exclude volatile items like fuel, climbed 0.48% compared to the previous month, versus the 0.49% median expectation.

Key Insights

• Arturo Herrera, who has been nominated as the next Banxico governor after stepping down as finance minister last month, said inflation was driven by climate-related issues and the rise in prices of durable domestic goods
• In a Citibanamex survey, economists said they expect year-end inflation to be around 6%, up from 5.8% previously
• Banxico’s June hike was the first rate increase since late 2018

©2021 Bloomberg L.P.