Mexico’s inflation surges in June

Mexico’s inflation surged in early June, surpassing expectations and pushing it further above the central bank’s target. This will likely prompt Banco de Mexico to keep its interest rates unchanged at its upcoming meeting.

Consumer prices rose 4.78 per cent year-on-year in the first half of June, exceeding analysts’ median forecast of 4.73 per cent and up from 4.59 per cent in the previous period.

Core inflation, excluding volatile items, accelerated to 4.17 per cent from 4.11 per cent, slightly below the 4.18 per cent estimate. The central bank’s target is 3 per cent, with a range of plus or minus one percentage point.

Initially, analysts from Citibanamex predicted a rate cut after May’s pause, leaving the key rate at 10.75 per cent. Now, they expect the bank to hold off until September due to persistent consumer price increases and inflation expectations above 3 per cent, influenced by summer spending and agricultural production losses from drought. Further pressure comes from the peso’s depreciation post-June 2 elections, hitting a 15-month low.

Governor Victoria Rodriguez affirmed Banco de Mexico’s capability to intervene if necessary but clarified that the bank does not target a specific peso rate.

The economic backdrop includes a slowing economy, where peso volatility could sway investor inflation outlooks, influencing central bank decisions.

Gabriela Siller of Banco Base suggested cautious optimism, with potential rate cuts likely later in the year, contingent on improved conditions. The peso’s decline partly stems from uncertainty surrounding President-elect Claudia Sheinbaum’s impending tenure and her party’s strengthened congressional control, linked to concerns over proposed constitutional changes by President Andres Manuel Lopez Obrador.

Analysts surveyed by Citi foresee inflation hitting 4.27 per cent by end-2024 and easing to 3.8 per cent by end-2025.

Attribution: Bloomberg