Mexico Keeps Rate for Second Month on Inflation, Peso Pressures
(Bloomberg) -- Mexico kept borrowing costs unchanged near a record high Thursday, as the combination of still rising consumer prices and peso volatility sidelined the central bank for a second straight meeting.
Banxico, as the central bank is known, held the key rate at 11% in a decision that had been forecast by 25 of 27 analysts surveyed by Bloomberg. The other two had predicted a quarter-point reduction.
Mexico’s policymakers in March became the last of Latin America’s big central banks to finally begin easing with inflation largely in retreat across the region. Since that meeting, though, annual consumer price readings in Mexico have risen for three straight months, the services component remains persistently elevated and a plunge by the peso threatens to pressure prices and unmoored inflation expectations.
Banxico Holds Key Rate at 11% for Second Straight Meeting | Annual inflation rate has been above central bank's 3% target since 2020
“We still see important risks, and the board is worried about the services component” of inflation, said Janneth Quiroz Zamora, director of economic research at Monex Casa de Bolsa, before Thursday’s decision. “That coincided with the uptick in the exchange rate, which could generate pressure on imported goods, and to a degree make Banco de Mexico become even more cautious.”
The process of disinflation in Mexico has been protracted and bumpy but when Banxico delivered its initial quarter-point cut, the most recent inflation data were cooling. The headline reading had slowed to 4.4%, still above the top of Banxico’s target, but nearly half the 8.7% cycle peak. The central bank targets inflation of 3% plus or minus 1 percentage point.
Since then, rising inflation prints and a post-June 2 election rout that sent the peso tumbling to a 15-month low may have pushed back any additional easing by months. The majority of analysts in the most recent Citibanamex survey see the next cut in September whereas just a month earlier most had seen a reduction this month.
In June so far, the peso has lost nearly 8% of its value, turning it into the worst-performing currency worldwide after being one of the best for much of the year, as investors saw Mexico as a safe haven, the high interest rates as appealing, and the floating currency as easy to trade at any hour.
The post-election jump in peso volatility ushers in a fresh round of problems. Governor Victoria Rodriguez said in a June 12 financial stability report that the bank could intervene if there was atypical behavior in the markets, though she did not pledge to do so.
Data on inflation in early June showed that consumer prices rose 4.78% compared to a year earlier. Core inflation, a metric that discounts volatile items such as food and fuel, also showed an acceleration of price-rises to 4.17%. Drought contributed in large part to the rise in produce prices.
With a possible economic slowdown on the horizon, and analysts projecting growth of 2.1% in 2024 and 1.7% in 2025, incoming President Claudia Sheinbaum has promised more government spending on social programs, fiscal responsibility and delaying major works until 2026.
Investor concern about Mexico’s next few months center on a set of constitutional changes proposed by President Andres Manuel Lopez Obrador, who will be in power until the end of September.
Sheinbaum has broadly supported his plans, and the new congress appears to have enough participation of the ruling party and its allies in order to approve the bills.
--With assistance from Rafael Gayol and Michael O'Boyle.
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