Mexico’s inflation slowed more than expected in early June to an over two-year low as the central bank is expected to hold its interest rate steady later on Thursday to assure consumer prices return to target.
(Bloomberg) — Mexico’s inflation slowed more than expected in early June to an over two-year low as the central bank is expected to hold its interest rate steady later on Thursday to assure consumer prices return to target.
Consumer prices rose 5.18% in the first half of the month compared to the same period a year earlier, down from 5.67% in late May, the national statistics institute reported Thursday. The result was below the 5.30% median estimate of economists surveyed by Bloomberg.
The further decline in Mexico’s headline inflation “will comfort policymakers at Banxico and ensure that interest rates are left on hold at 11.25% later today,” Jason Tuvey, deputy chief emerging markets economist of Capital Economics, wrote in a note.
While inflation is gradually slowing, it still remains above Banxico’s target of 3%, plus or minus a percentage point. Central bankers have pledged to keep rates restrictive for a prolonged period of time to bring consumer price increases closer to that goal, before starting to ease monetary policy.
Core inflation, which excludes volatile items such as fuel and food, was 6.91% on an annual basis, below the previous measure of 7.32% and lower than the median estimate of 7.03%. The metric had been a key concern for central bankers, as it had remained much above the headline rate in recent months.
Thursday Decision
The central bank winds up its June rate decision on Thursday afternoon, with policymakers widely expected to stay on hold at 11.25%. Economists are divided on whether the bank will cut rates later this year or wait until early 2024.
Governor Victoria Rodriguez said in May that board members will keep rates at a record-high for at least the next two meetings, and was echoed by central banker Jonathan Heath, who said policymakers want to keep monetary policy restrictive “for as along as possible.”
“If this trend continues, there’s the possibility that the bank will cut rates at the end of this year,” said Janneth Quiroz Zamora, vice president of economic research at Monex Casa de Bolsa. “These good results will start to impact inflation expectations for the next 12 months.”
In May, Banxico ended its record hiking campaign, which had raised the benchmark rate 725 basis points since June 2021. Borrowing costs are now higher than at any time since the central bank started targeting inflation in 2008.
The central bank continues to benefit from an appreciating peso, which hit the strongest level in more than seven years in touching 17.0464 per dollar. In the past year, the currency has appreciated more than 17% against the dollar, the best performer in a basket of 31 currencies tracked by Bloomberg.
Economists in the most recent Citibanamex survey published Tuesday expect inflation at the end of 2023 to be 4.99%, down from a forecast of 5.18% in April, with the core forecast inching down to 5.30% from 5.32%. Banxico’s key rate is expected to end 2023 at 11%, while the economy is seen growing 2.20% this year and 1.50% in 2024, according to the survey’s results.
–With assistance from Rafael Gayol.
(Updates first paragraph, adds analyst comments starting in third paragraph and chart)
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