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Mexico’s Slowest Inflation in 2 Years Opens Door for Rate Cut

Mexico’s Slowest Inflation in 2 Years Opens Door for Rate Cut

(Bloomberg) -- Mexico’s annual inflation rate in July fell to the lowest level since late 2016, opening the door for the central bank to cut borrowing costs as soon as next week after the economy stagnated.

Prices increased 3.78% from a year earlier, down from 3.95% in June and in line with the forecast by economists in a Bloomberg survey, the national statistics agency reported on Thursday. In the second half of the month, the annual rate fell to 3.72%. The central bank targets inflation at 3%, plus or minus one percentage point.

Economists expect the central bank to cut the key interest rate from a decade-high 8.25% in September, according to the median forecast of economists in an Aug. 6 survey by Citibanamex. That would give the historically cautious central bank more time to see confirmation of the inflation slowdown.

A handful of firms, including Capital Economics, Credit Suisse, Santander and Vector, see policy makers being more aggressive, reducing borrowing costs in their next scheduled decision, on Aug. 15. Traders see a 26% chance of a cut next week, up from 3% a week ago.

Thursday’s inflation data “keeps an interest rate cut at next week’s policy meeting on the table,” Capital Economics analyst Edward Glossop wrote in an e-mailed research report. “It will be a close call, but on balance we think the central bank will shrug off the recent weakness in the peso and cut rates by 25 basis points.”

What Our Economist Says

“Lower headline inflation in July is goods news, but is likely to provide little relief for policy makers because the decline was mainly explained by abating energy price changes, while core inflation was again little changed. Higher services inflation will add to concerns that the central bank has mentioned before.”
--Felipe Hernandez, Bloomberg Latin America economist

The peso has weakened 2.7% to 19.58 per dollar since the Federal Reserve cut interest rates on July 31.

Mexico’s Slowest Inflation in 2 Years Opens Door for Rate Cut

MEXICO REACT: Inflation Falls, Yet Central Bank Concerns Linger

The central bank left the reference rate unchanged in its last decision at the end of June in a divided vote where one of five board members preferred a reduction. A second member said that lower borrowing costs might be needed soon if inflation kept slowing.

Mexico’s economy is likely to grow 0.6% this year, the least since the 2009 financial crisis, according to the median forecast in the Citibanamex survey, following an unexpected contraction in the first quarter and growth of just 0.1% in the second quarter.

To contact the reporter on this story: Eric Martin in Mexico City at emartin21@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Matthew Malinowski

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