Mexico Inflation Slows Less Than Expected

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Mexico’s annual inflation slowed less than expected in January, with a core metric hitting a 20-year high, as the central bank mulls another interest rate hike under new Governor Victoria Rodriguez Ceja.

Consumer prices rose 7.07% last month from a year earlier, above the 7.01% median estimate of economists surveyed by Bloomberg, according to data released by the country’s statistics institute Wednesday. On a monthly basis, prices gained 0.59% compared to a 0.54% estimate.

Core inflation, which excludes volatile items like fuel and is closely watched in Mexico, accelerated to 6.21%, its highest since Sept. 2001.

“The dynamics in core inflation are worrisome, core continues to increase despite very weak growth and will push Banxico to continue hiking significantly,” Bank of America Corp. economist Carlos Capistran said.

Latin America’s second-largest economy is facing an inflation spike driven by supply chain issues and the economy’s recovery after the height of the pandemic, with annual price gains reaching 7.37% in November, their highest point since 2001.

Analysts polled by Bloomberg before Wednesday’s inflation data expected the central bank, known as Banxico, to deliver a second straight half-point interest rate hike Thursday, taking borrowing costs to 6%. Banxico targets inflation at 3%, plus or minus one percentage point, and Capistran sees the bank boosting rates until eventually hitting 8%.

Deputy Governor Jonathan Heath said in comments aired last week that he expects a quarter- to half-point hike during Thursday’s meeting. From March, it may be hard to hike by 50 basis points during each meeting as Mexico waits for the U.S. Federal Reserve to act and needs to take into account its own sluggish economy, he said.

Inflation is likely to stay above 6% during at least the first quarter, as prices are hit by external supply chain issues and by a continued influx of remittances from Mexican workers abroad, said Gabriela Siller, an economist at Banco BASE.

Mexico fell into recession in late 2021 after its economy shrunk 0.1% in the fourth quarter. The government of President Andres Manuel Lopez Obrador declined to inject any major fiscal spending to keep activity afloat since the start of the pandemic, arguing that it didn’t want to increase the country’s debt burden.

Under the leadership of Rodriguez Ceja, who was appointed to head the central bank since the start of the year, Banxico has the tricky task of tightening monetary policy to fight sticky inflation at the risk of hurting a stalled economy.

Source: El Financiero

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