In December, Mexico witnessed a higher-than-anticipated increase in consumer prices, fueled by heightened holiday season spending, placing added pressure on the central bank. As the Bank of Mexico (Banxico) contemplates potential interest rate cuts in the coming months, the inflation figures add complexity to the decision-making process.
According to the national statistics institute’s report on Tuesday, consumer prices in Mexico rose by 4.66% compared to the same period a year earlier, surpassing the 4.32% recorded in November. This figure exceeded the median estimate of 4.57% provided by analysts in a Bloomberg survey. Meanwhile, core inflation, a metric excluding volatile elements such as fuel, decelerated to 5.09% from November’s 5.3%, falling below economists’ projection of 5.15%.
Despite the headline inflation rising to 4.7%, analysts like Marco Oviedo, a senior strategist at XP Inc., view the decline in core inflation as favorable for Banxico. Oviedo remarked, “So this is a good set-up for Banxico to start discussing a cut in the Feb. 8 meeting.”
However, not all economists share this optimistic outlook, particularly given the challenging circumstances impacting Mexico. Andres Abadia, Chief Latin America Economist at Pantheon Macroeconomics, expressed skepticism, stating that December’s “ugly numbers” likely eliminate any possibility of the central bank cutting rates in February. He attributed the negative impact on food prices to bad weather affecting key crops, disrupting the downward trend seen in the latter half of 2023.
Fresh fruit and vegetable prices, for instance, experienced an 11.68% increase compared to the previous year.
Analysts surveyed by Citibanamex before the decision expected a quarter-point rate reduction in March. The Mexican peso faced a slight weakening, around 0.2%, reflecting broader losses in emerging market currencies.
In December, Banxico cautiously explored the potential for rate cuts in 2024, emphasizing a gradual approach, as revealed in the meeting minutes. The central bank has maintained its key rate at a record 11.25% for six consecutive meetings, setting a target inflation rate of 3%, with a permissible range of plus or minus 1 percentage point.
The Federal Reserve’s consideration of cuts in 2024 provides an opportunity for Banxico to align its policies accordingly. Despite the uncertain economic environment, Banxico’s forward guidance in December reiterated its commitment to holding the current rate “for some time.”
