Mexico’s Inflation Slows More Than Expected With Central Bank on Hold


 Mexico’s annual inflation slowed past all forecasts in early October as the central bank pledges to hold interest rates at a record high in Latin America’s second-largest economy.

Consumer prices rose 4.27% in the first half of the month compared to the same period a year earlier, down from 4.47% in late September, the national statistics institute reported Tuesday. The print was below all analyst forecasts in a Bloomberg survey that had a 4.37% median estimate.

Core inflation, which excludes volatile items, slowed to 5.54% from a year prior, just above the 5.49% median forecast.

Higher airfare and tourist package prices contributed to early October’s print, along with certain food items. Even so, annual inflation reached its lowest level since early March 2021.

Mexico’s central bank, known as Banxico, has pledged to keep its interest rate at a record 11.25% for a prolonged period of time, with policymakers arguing that it’s necessary to monitor consumer price developments. They marked up their inflation forecasts for upcoming quarters in their September decision statement, and deputy Governor Jonathan Heath said it was possible the data-dependent bank could hold through June.

Read more: Mexico Central Bank Deputy Floats Rate Cut Delay to Mid-2024

“Overall demand in Mexico remains very strong, and this is reflected in services in general,” said Carlos Capistran, chief Mexico and Canada economist for Bank of America. “We expect inflation to be very volatile going forward, and Banxico is looking not only at inflation but also at its determinants. Growth remains resilient and the labor markets remains tight.”

Previously, the two-week inflation print accelerated slightly in late September, a worrying sign amid rising energy and food prices that could be reflected in the more volatile non-core component in coming months. Electricity subsidies in certain states expire around this time of year, pressuring prices.

“The volatility is going to continue, but it’s difficult to know now for how long, especially since the start of the conflict in the Middle East,” said Jessica Roldan, chief economist at Casa de Bolsa Finamex. “The panorama has worsened a bit, and the upward revision has to do with the energy prices.”

Economic Strength

The strength of Mexico’s economy is also one of the factors that has raised concerns at the bank, given that growth is projected to hit 3.3% this year and 2% in 2024, according to a survey by Citibanamex. Unemployment has remained low and salaries have risen, which has helped spur domestic spending even while tourism — an important source of revenue — has dropped.

That performance is due in part to the steadiness of the US economy — which is the No. 1 destination for many of Mexico’s export goods. The country’s northern and central states are seeing higher levels of investment as companies work to shorten supply lines by moving closer to their North American clients, a trend that is often called “nearshoring.”

“While the labor market is behaving as it is, it’ll be hard to see a deceleration. There’s a delay in the moment in which we’ll see any deceleration in economic activity caused by high interest rates,” said Janneth Quiroz Zamora, director of economic analysis at Monex Casa de Bolsa. “We’re still receiving benefits due to nearshoring, and there’s greater public spending.

Economists are pushing back their estimates of when Banxico will begin unwinding its record tightening cycle. In the most recent survey conducted by Citibanamex, analysts now predict policymakers will hold off on their first rate cut until March, beginning with a 25 basis-point reduction.

Unlike peers in Latin America, Banxico has maintained a more hawkish tone in the statements accompanying recent decisions and repeatedly said it will maintain the current rate for a “prolonged period.”

Source : Yahoo