Mexico Inflation Eases, Opens Door to New Interest Rate Cuts

RIO DE JANEIRO, BRAZIL – Mexican consumer price inflation stood at 3.15% in the year through December, the national statistics agency said on Thursday, January 7th, in line with the central bank’s target range and opening up the door to further interest rate cuts.

The Bank of Mexico, or Banxico, last month held its benchmark interest rate unchanged at 4.25% for the second consecutive meeting and said inflation expectations for the medium and long term remain stable at levels above 3%.

Minutes of the December monetary policy meeting published on Thursday, January 7th, showed board members Jonathan Heath and Gerardo Esquivel had voted to cut the benchmark interest rate by 25 basis points to 4.0%.

“Most members agreed that the decision to leave the policy rate unchanged constitutes a pause which provides the necessary room to confirm the convergence of the inflation trajectory to its target,” the minutes state.

Banxico targets inflation of 3%, with a tolerance range of 1 percentage point plus or minus.

The median forecast of nine analysts surveyed by Reuters had expected inflation to dip to 3.16% from 3.33% registered in November. Inflation eased in the last month of 2020 as prices for food items decreased, data from the INEGI statistics agency showed.

New Banxico member Galia Borja, who is replacing relative hawk Javier Guzman on the bank’s board, may tip the scales in favor of a rate cut at the next policy meeting in February.

“With concerns about inflation likely to ease, and the economy currently hit by a renewed surge in COVID-19 infections, we think that more board members will opt for additional easing,” said Nikhil Sanghani, Latin America economist at Capital Economics.

Sanghani expects Banxico to enact one more interest rate cut of 25 basis points at the Feb. 11 meeting, taking the policy rate to 4.00% and finalizing the bank’s easing cycle.

Goldman Sachs economist Alberto Ramos said it was increasingly likely the bank will restart the easing cycle in February, citing the weak economy, low inflation and robust peso as factors.

The central bank minutes said the recovery of Mexico’s economy will be gradual and prolonged, as consumption and investment continue to show lackluster performance.

Consumer prices rose 0.38% in December, according to nonseasonally adjusted figures. The core index, which strips out some volatile food and energy prices, rose 0.55% during the month.