Mexico’s Stubbornly Elevated Inflation Keeps Rate Hikes on Table

Mexico’s annual inflation stayed way above the central bank’s target ceiling in June, keeping in play the possibility of further key interest rate hikes in coming months.

Consumer prices increased 5.88% in June compared to a year earlier, well over the bank’s 4% target ceiling and little-changed from 5.89% in May, the national statistics institute reported Thursday. The median estimate of economists surveyed by Bloomberg was 5.87%. Prices rose 0.53% compared to a month earlier.

The central bank surprised analysts by boosting its key rate a quarter-point to 4.25% in a split decision last month, its first hike since late 2018.

Mexico’s Stubbornly Elevated Inflation Keeps Rate Hikes on Table

In slightly more encouraging news for the bank, inflation slowed in the second two weeks of June to 5.74%, compared to 6.02% two weeks earlier.

A near doubling in the annual inflation rate, led by a surge in fuel costs, has surprised economists this year. At the same time, strong demand from the U.S., Mexico’s biggest trading partner, coupled with a domestic economic recovery and vaccine rollout prompted many analysts to mark up their 2021 GDP forecasts.

Core prices, which exclude volatile items like fuel, accelerated slightly in June to 0.57%, roughly in line with the 0.56% median estimate. On an annual basis, they increased 4.58%.

The central bank targets inflation at 3%, plus or minus 1 percentage point.

Key Insights

  • Deputy Governor Jonathan Heath, seen as a swing vote on the five-member board, said last week the central bank would need to take action if inflation doesn’t slow to 5% during most of the rest of the year
  • President Andres Manuel Lopez Obrador’s appointment of Arturo Herrera as the governor of Banxico, as the central bank is known, in 2022 could change the balance of the board
  • Banxico said it expects inflation to stay above-target until 2022, when short-term pressures ease
  • The bank raised an unusual red flag in last month’s decision by signaling that Mexico’s ongoing drought is a factor affecting inflation

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