Mexico’s inflation rate surged more than anticipated in early June, moving further away from the central bank’s target. This development likely supports expectations for Banco de Mexico to maintain its interest rate in the upcoming meeting on Thursday.
Consumer prices increased by 4.78% in the first half of June compared to the previous year, surpassing the median estimate of 4.73% from analysts surveyed by Bloomberg and up from the 4.59% rise observed in the prior two-week period.
Core inflation, excluding volatile items such as food and fuel, climbed to 4.17% from 4.11% in the previous reading, slightly below the forecasted 4.18%. The central bank aims for inflation at 3%, with a tolerance range of plus or minus one percentage point.
The primary drivers of this inflation were food items like bananas and oranges, which were impacted by drought conditions. Additionally, services inflation, a significant concern for central bankers, remained persistently high. Jessica Roldan, chief economist at Casa de Bolsa Finamex, noted, “The increase in the fruits and vegetables component was much greater than anticipated. This could persist due to prolonged dry weather and potential future factors like stronger rains affecting crops.”
Previously, analysts surveyed by Citibanamex had predicted that the central bank would cut rates after a pause in May left the key rate at 11%. However, they now expect the bank to wait until September before deciding on a rate cut, as inflation remains above the 3% target, driven by summer spending and climate issues.
The central bank must also consider the potential inflationary impact of the peso’s depreciation. Following a post-June 2 election rout, the currency fell to a 15-month low. Governor Victoria Rodriguez mentioned that Banco de Mexico has the tools to intervene if necessary but does not target an optimal peso rate.
Amid a slowing economy, the volatility of the peso could alter investors’ inflation expectations, potentially influencing the central bank’s decisions. Kimberley Sperrfechter, an emerging market economist at Capital Economics, wrote, “The continued strength in core services inflation, combined with the post-election slump in the peso and heightened political uncertainty, means Banxico is unlikely to restart its easing cycle at Thursday’s Board meeting.”
Gabriela Siller, chief economic analyst at Banco Base, anticipates that only one member of the five-person board might vote to cut borrowing costs, given the exchange rate’s impact on inflation. “The quick depreciation of the peso could generate inflationary pressures, but their magnitude can vary, so it would be prudent to wait and see,” Siller said. “We believe they will cut rates twice more this year, but towards the end when conditions are better.”
The peso’s decline was partly driven by uncertainty regarding President-elect Claudia Sheinbaum’s potential policies, as her party’s coalition now holds a majority in Congress. Analysts surveyed by Citi forecast inflation to reach 4.27% by the end of 2024 and 3.8% by the end of 2025.
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