Mexico Annual Inflation Tops All Forecasts Before August Rate Decision

Mexico’s headline inflation accelerated much more than expected early this month، complicating investor bets that Banco de Mexico will resume interest rate cuts in August.

Official data published Wednesday showed consumer prices rose 5.61% in the first two weeks of July from the same period a year earlier، above all forecasts in a Bloomberg survey of economists that had a 5.38% median estimate.

Closely-watched core inflation، which excludes volatile items such as food and fuel، slowed to 4.02% from 4.08% in the prior reading، matching the median estimate of the survey. The central bank targets inflation at 3%، plus or minus one percentage point.

Borrowing costs unchanged

Banxico، as the Mexican central bank is known، kept borrowing costs unchanged at 11% in a 4-1 split decision on June 27، with board member Omar Mejia voting for a quarter-point cut. Governor Victoria Rodriguez Ceja has said recent progress in the disinflation process would allow the bank to discuss lowering rates in the future.

The driver of early July’s faster-than-expected reading was non-core inflation، which accelerated 10.64% from a year prior. Fruits and vegetables spiked 6.15% compared to the prior two-week period، while agricultural products rose 3.49% and energy prices increased 1.59%.

“My feeling is central bankers will prioritize the improvement we see in core measures، which came in line with estimates، and cut،” said Jessica Roldan، an economist at Casa de Bolsa Finamex. Still، August’s rate decision remains a coin toss between a reduction and another pause، she said. “It’s tricky to lower rates when this print should increase the bank’s inflation estimates.”

Earlier this month، Banxico’s Mejia said there could be an adjustment in the benchmark interest rate in the bank’s next meeting Aug. 8، but that any cuts would have to be gradual and wouldn’t imply the beginning of an easing campaign.

Analysts in a Citi survey published July 22 expected policymakers to lower borrowing costs by a quarter-point next month. Yet، they also raised their 2024 year-end inflation forecast to 4.4% from 4.3% previously، and to 3.85% for year-end 2025 from 3.8%.

Resuming easing cycle

“Our base case remains that Banxico will resume its easing cycle next month،” Kimberley Sperrfechter، an emerging markets economist at Capital Economics، wrote in a note. But given Wednesday’s print pushes inflation to the highest in the last 14 months، chances of a cut are “somewhat” diminishing، she wrote.

Policymakers led by Rodriguez have been battling persistent inflationary pressures and market volatility، making their last rate decision “one of the most complex” of the recent monetary cycle، according to the minutes to that gathering.

The decision to keep rates unchanged for a second straight month was influenced by persistent price increases and asset swings following June’s presidential election.