Mexico’s inflation rate inched up more than anticipated in May. It exceeded the upper limit of the target range set by the central bank, and added to the conundrum surrounding monetary policy in Latin America’s second largest economy.
Data released by the national statistical agency INEGI on Monday showed that consumer prices increased by 4.42% annually, up from 3.93% last month and higher than the 4.38% predicted by an economist poll conducted by Reuters.
The Bank of Mexico has been reluctantly lowering the interest rate. This will likely be seen as an indication of increasing inflation pressures.
Central bank targets 3% inflation with one point margin either side.
This reading puts inflation over that line in May and further clouds the future trajectory of interest rates.
Banxico is testing its rate-cutting cycles
Banxico’s benchmark interest rate was cut by 50 basis point at the three last policy meetings. It reached 8.5% in may, which is its lowest since 2022.
At the time, policymakers indicated there could be additional reductions, citing predictions for a disinflationary tendency.
This meeting will take place in a different environment.
The bank is in a worse situation with inflation on the rise.
Although recent rate reductions have been intended to stimulate economic growth, persistent high inflation could force policymakers to reconsider the speed and magnitude of any future cuts.
Banxico may be more conservative in its approach, even though the inflation rate is not expected to fall further.
Analysts are split on whether or not the bank plans to continue its reduction rate, take smaller steps, pause, or stop altogether.
The headline surprise is driven by non-core price increases
INEGI data shows that the increase in inflation is primarily due to increases in the non-core price, which includes components such as food and energy, with higher volatility.
In May, the headline consumer prices index rose by 0.28%. This was a bit higher than expected.
The core inflation index (which excludes volatile categories, and which is important for central bankers to monitor) also increased by 0.30%, just above the expectations of economists.
The continued rise in prices at the underlying level indicates that inflationary pressures do not only come from external shocks or temporary ones.
This trend could have an impact on the long-term expectations of inflation and Banxico’s policy.
Analysts and investors re-calibrate their expectations
The rise in inflation is causing economists to disagree about what the best course of action will be.
Others believe that the current trend does not warrant a rate cut, even if it is smaller.
Now, the outlook depends on what happens to inflation in the coming months. Banxico could be forced to slow down the rate of decreases or postpone future easing if price increases remain high.
If inflation does moderate, however, the central banks may continue to relax monetary policy.
The June Decision is a key turning point
The June 26th decision will be remembered as a landmark moment, with inflation nearing the limit of Banxico’s tolerance range.
The policymakers need to strike the right balance between controlling inflation and maintaining an economy which is still vulnerable both internally and globally.
Banxico may have to adjust its monetary policy plan based on the current data.
As new information becomes available, this post Mexico’s rebound in inflation clouds Banxico’s outlook for easing may change.
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