Inflation Figures Nailed It!
Weekly Market Snapshot
- Mexico’s Inflation Keeps its Cool, Slowing for the Sixth Consecutive Month as Predicted.
Behind the Headlines: What happened?
Mexico’s inflation continues its downward dance, easing for the sixth straight month to 4.79%, as shown by data from statistics agency INEGI. This slide follows a prolonged cycle of interest rate hikes, and the headline figure matches market expectations, marking a more than two-year low after hitting a record high of 8.7% last year.
In July, the annual core inflation stood at 6.64%, undercutting the forecasted 6.68% and hitting the lowest note since February 2022. Food prices, led by the likes of avocado, onion, and bananas, played a significant role in driving up inflation, joined by expenses in air transport, housing, and tourist services. However, services inflation remains unchanged at 5.2% year-over-year since June. This adds to the pressure on policymakers to keep their guard up and stay watchful.
The Inside Scoop:
Mexico’s inflation cooled down as predicted last month, yet it stayed high when the wild swings of volatile items were ignored, underscoring the central bank’s stance that it’s too early to entertain thoughts of easing monetary policy. The minutes of Banco de Mexico’s June meeting have unveiled that the five board members are yet to delve into discussions about a timeline for reducing interest rates. They had deemed it too early to initiate such a conversation. This reticence has triggered a wide array of predictions concerning when the central bank, commonly referred to as Banxico, will ultimately opt for a more relaxed approach.
“It’s a seasonal matter, but once the vacations are over we’ll see the opposite effect: services prices will start to go down, but there will be other factors,” said Janneth Quiroz Zamora, director of economic analysis at Monex Casa de Bolsa.
Connecting the Dots:
In late June, the Bank of Mexico, holding an inflation target of 3% with a one percentage point flexibility, chose to keep its benchmark interest rate unchanged at an unprecedented 11.25%. This decision implies a potential extended period of maintaining this rate, indicating the bank’s efforts to steer inflation back within its target range. In a recent podcast, Mexican central bank board member Jonathan Heath expressed his conviction that the benchmark interest rate is currently at the right level. He emphasized that the central bank has no intention of raising it further, even in the wake of potential additional U.S. rate hikes.
The Bottom Line:
The Mexican peso has shone as a star player among major global currencies this year, hitting a seven-year peak this month. This rise has been fueled by a consistent stream of remittances, robust export expansion, and a surge in private investments, contributing to its remarkable performance. Despite the cautious stance on interest rates, the bank seems to exude confidence in economic growth. Just recently, it elevated its growth projection for 2023 to 2.3%, a considerable leap from the previous forecast of 1.6% in its March report. As Banxico gears up for its next interest rate decision, investors are likely keeping a keen eye on this dynamic interplay between cautious monetary policy and an optimistic growth outlook, hoping for insight into the bank’s strategic navigation amidst a changing economic landscape.
