Drop in inflation surprises Mexico but rate hike will persist

Headline inflation in Mexico surprised the market this Thursday with its fourth consecutive biweekly decline, but experts maintain the expectation of a 25 basis point increase in the interest rate at the Bank of Mexico’s (Banxico) monetary policy meeting next week. .

The National Institute of Statistics and Geography (Inegi) reported this Thursday that the Mexican general inflation rate fell to 7.12% in the first half of March, while the private sector consensus expected 7.24%.

According to an analysis by Ricardo Aguilar, chief economist at Invex, inflation “surprise downside” with its lowest level since January 2022.

While economic organization Mexico, How are we going? (MCV) indicated that “reached its lowest point for a first fortnight since November 2021″.

Both analyzes highlight that inflation fell more than expected by the market, which calculated a monthly increase of 0.26%, while it only registered a variation of 0.15%.

According to Invex estimates, inflation could reach 7% at the end of March, drop from 6% in May and end 2023.”slightly above 5%”.

Rate hike could moderate

But the level of inflation is still above Banxico’s target of 3% and is higher than that of countries like the United States and Brazil.

For this reason, the market estimates that Banxico will increase the interest rate by 25 basis points, as this is the measure with which the central bank seeks to control the increase in prices.

“Banco de México could moderate its stance as long as inflation maintains a low trajectory”, the chief economist of Invex pointed out in his analysis.

Aguilar announced that Invex expects an increase of 25 base points for the next Banxico announcement.

In this same sense, the BBVA México bank positioned itself, which predicted this Thursday that Banxico will maintain a “very restrictive position during 2023-24″ and an equal increase in the interest rate.

“But with inflation falling, a cycle of rapid declines in 2024 will be necessary to avoid an unnecessary further increase in real rates.”, he added in a report.

In this sense, BBVA analysts considered that Banxico will resume “a gradual approach” in their next monetary policy decisions, resuming the rate of increases of 25 base points until reaching 11.5%.

This is in line with private analysts who estimate that the rate will reach 11.5% by the end of 2023, according to the latest Citibanamex survey of the main 33 financial groups in the country.

Until last February, Banxico has made 14 consecutive increases to the reference rate.

Inflation red light

In MCV’s inflation monitoring, the consumer price traffic light remained red in the first half of March, mainly due to the increase in the prices of food and tourist services.

Among the main generic products that affected inflation were: air transport, lemons, restaurants and the like, packaged tourist services, corn tortillas, own homes, potatoes and other tubers, among others.

Instead, they surprised reductions in energy costs such as liquefied petroleum gas (LP), tomato, chicken, nopales, eggs, lettuce and cabbage, computers, pork, and electricity.

Source: EFE