Inflation in Mexico accelerates and maintains pressure on Banxico

Consumer prices rose 7.91% annually, above the 7.82% in December, the National Institute of Statistics and Geography (INEGI) reported on Thursday. The reading matched the 7.91% median estimate of economists surveyed by Bloomberg.

Core inflation, which excludes volatile elements such as fuel, accelerated to 8.45%, compared to 8.35% in December, slightly above the median of economists’ estimates of 8.44%. The indicator, which is closely watched in Mexico, slowed down in December for the first time in two years.

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Inflation appears to have peaked at 8.7% in September, but has stalled for the past two months, putting pressure on the central bank to continue its tightening campaign. The bank, known as Banxicoannounce a quarter-point hike later Thursday, which would take its key rate to a record 10.75%.

The bank announced a half-point increase in December and signaled at least one more increase in the pipeline, having raised borrowing costs by 650 basis points in 13 meetings since 2021.

Deputy Governor Jonathan Heath told Bloomberg News last month that the bank could end its tightening campaign with the key rate between 10.75% and 11.5%. He also said that the rate, now at 10.5%, would remain at its final level for at least six months to ensure that inflation subsides.

The main question for economists going forward is whether and to what extent Banxico will continue to raise interest rates after the president of the Federal Reserve, Jerome Powellsaid it was expecting “a couple” more hikes this cycle, when it raised the key rate by a quarter point last month.

Banco de México slowed down its tightening campaign in December, raising rates by 50 basis points after four consecutive 75 basis point hikes, promising to raise borrowing costs again in February.

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Banxico’s board meeting on Thursday will be the first for new deputy governor Omar Mejía, a surprise election whose nomination was confirmed by lawmakers last month. Mejía, a former adviser to the five-member board who worked closely with Lieutenant Governor Galia Borja, replaces the dovish-leaning Gerardo Esquivel, who voted for a slower pace of adjustment than his peers in 2022 banking decisions.

Economists expect inflation to end 2023 at 5.15%, according to a Citibanamex survey released this week, up from the 5.02% forecast a month ago. They estimate interest rates will hit 10.5% by the end of the year, suggesting the bank will start cutting later in the year, and expect the economy to grow 1%, versus a previous forecast of 0.9%.

The Mexican government has implemented measures to curb consumer price increases, recently extending a commodity-focused inflation pact to ensure affordable items are on supermarket shelves.