The rise in inflation complicates the outlook for the Bank of Mexico

The increase in the prices of tomatoes, green tomatoes, serrano peppers and other foods has complicated the scenario of a rate cut for the Bank of Mexico. The downward outlook in this indicator began to emerge last March, after the institution lowered rates from 11.25% to 11%, precisely, warning of a disinflationary trend in the country. Five weeks later, the picture has changed, now, the pools of the financial headquarters assume that, faced with the rebound in the price increase to 4.63% during the first half of April, the central bank will opt for caution and will keep the reference rate unchanged. The interest rate set by Banxico is used in the financial system as a reference in mortgages, loans and more, so it has a direct impact on investment and the Mexican economy.

“Banco de México’s priority objective is to maintain low and stable inflation.” With this sentence you open the central bank’s website. For this purpose, the institution has set the inflation goal for the country at 3%, a figure that is still far from reality. From the end of March to the beginning of April, inflation went from 4.42% to 4.63%. This increase was driven by the increase in prices in different products: from agriculture to services, gas and gasoline. The data represents a challenge for Banxico, whose main tool to contain price escalation is the interest rate. The recent increase in inflation places its members in the dilemma of being consistent with their latest cut decision and lowering rates even further or maintaining the reference rate at 11% due to the slight rise in inflation. The currency is in the air, however, the consensus of analysts outlines that the institution will opt for caution and leave this indicator unchanged.

Faced with an inflationary scenario that resists linear behavior, the governor of Banxico, Victoria Rodríguez Ceja, has reiterated in several forums that the institution will continue with responsible and prudent management of monetary policy. The next monetary policy decision of the Bank of Mexico will occur on May 9. Until then, the pools remain on the board. The recent survey of specialists, carried out by the central bank, gauges the perception of financiers about the behavior of inflation and the performance of the Mexican economy. The survey predicts that inflation will be 4.16% at an annual rate at the end of 2024, an increase compared to the forecast of 4.10%, published in March.

The chief economist of BBVA in Mexico, Carlos Serrano, points out that the Bank of Mexico should continue with the reduction in rates because, despite the increase, the inflation data is positive. “It was good data because underlying inflation (which excludes prices of more volatile goods and services such as energy and agriculture) decreased and continues on a downward trajectory. Both core merchandise inflation fell, from 4.1% to 3.7%, and services inflation, from 5.3% to 5.2%. The reason headline inflation picked up was because of an increase in food prices. We know that these are more volatile and, in my opinion, monetary policy should not react to data in this component,” he indicates.

Serrano affirms that the real rate in Mexico is at extremely restrictive levels – it is the highest real rate in the G20 with the exception of Russia and the highest among investment grade countries – and that underlying inflation is going down, in his opinion, should result in the rate reduction cycle continuing its course. However, it also recognizes that the inflationary rebound increases the probability of a pause in cuts, especially considering that, internally, the Banxico Governing Board is very divided over the path that monetary policy should follow and that some of its members consider that restrictive rate levels must be maintained for longer. At BBVA México they aim for an end to the year with an inflation of 4% and a rate of between 9.25% and 9.75%.

Gabriela Siller, Director of Analysis at Banco Base, points out that the central bank’s governing board is facing a challenge due to the double-edged sword of keeping rates so high. “The rise in inflation does complicate the picture, because, on the one hand, maintaining the high interest rate helps combat high inflation which, well, is definitely not transitory, but, on the other hand, maintaining the rate “High interest rates help the exchange rate to be overvalued and this, eventually, can lead to a rapid rebound and imbalances in the financial market,” he explains. Banco Base’s forecast is that the Government board will take even longer to cut the rate and, in total, it will cut it by 100 basis points to close the year at 10.25%.

James Salazar, deputy director of Economic Analysis at CI Banco, says that the rebound in price escalation should not change the perception of the central bank’s governing board and, therefore, its downward stance on rates, without However, it is very likely that in the next monetary policy meeting the indicator will remain at the same level. “The interesting thing is that Banxico dared to lower interest rates even though inflation was well above the target, so if Banxico wanted to be consistent it should lower the rate, because otherwise it would seem that the market is putting pressure on you,” ditch. The expert considers that there is still room for rates to continue falling and close this year at a level of 10.25%, while inflation could end the year at 4.15%.

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