Mexico inflation rises to highest in over 3 years; basic interest rate seen on hold

RIO DE JANEIRO, BRAZIL – Mexican annual inflation rose faster than anticipated in the first half of April, reaching its highest level in more than three years and far surpassing the central bank’s target range, official data showed on Thursday.

The national statistics agency (INEGI) said consumer price inflation in the year through the first half of April rose to 6.05%, on the back of increasing energy and food, beverage and tobacco prices.

The figure exceeded the final consensus forecast of a Reuters poll of analysts for a headline reading of 5.84% and is the highest level since the 6.85% registered in the second half of December 2017.

It makes the Bank of Mexico, which targets inflation of 3% with a one percentage point tolerance range above and below that, less likely to cut its main interest rate on May 13.

“At first glance this seems alarming, although it was mainly a result of base effects related to low oil prices a year ago,” said Nikhil Sanghani, Latin America economist at Capital Economics, who sees the Bank of Mexico keeping its key rate on hold at 4.00% “for longer than investors currently expect.”

Additionally, headline inflation likely peaked and looks set to drop towards the central bank’s 2% to 4% target range in the coming months as the unfavorable base effects from energy prices unwind, Sanghani added.

Bank of Mexico Governor Alejandro Diaz de Leon was quoted as saying last week that the recent spike in Mexican inflation is expected to be transitory.

Mexican consumer prices rose 0.06% during the first half of April, compared with the preceding two week period, INEGI said.

The closely watched core price index, which strips out some volatile food and energy prices, climbed 0.18% in early April. The core rate of annual inflation advanced to 4.13%.