Mexico’s Inflation Accelerates, Keeping Pressure on Banxico

(Bloomberg) — Mexico’s inflation accelerated roughly in line with expectations in January, giving policymakers little room for maneuver at the central bank’s first interest interest rate decision of the year later on the day.

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Consumer prices rose 7.91% on an annual basis, up from 7.82% in December, the national statistics institute reported Thursday. It matched the 7.91% median estimate of economists surveyed by Bloomberg.

Core inflation, which excludes volatile items such as fuel, sped up to 8.45% from 8.35% in December, slightly above economists’ median estimate of 8.44%. The measure, which is closely watched in Mexico, slowed in December for the first time in two years.

Inflation seems to have peaked at 8.7% in September, but it’s stalled over the past two months, putting pressure on the central bank to continue its monetary tightening campaign. The bank, known as Banxico, is expected to deliver a quarter-point hike later on Thursday, to take its key rate to a record 10.75%.

The bank delivered a half-point increase in December and signaled at least one more hike in the cards, having boosted borrowing costs 650 basis points over 13 meetings beginning in June 2021.

Deputy Governor Jonathan Heath told Bloomberg News last month the bank may end its tightening campaign with the key rate between 10.75% and 11.5%. He also said the rate, which is now at 10.5%, would then be held at its final level for at least six months to ensure inflation subsides.

Read more: Mexico Should Keep Its Peak Rate for Six Months, Heath Says

Economists’ top question going forward is whether, and how far, Banxico will keep boosting interest rates, after Federal Reserve Chair Jerome Powell said he expected a “couple” more hikes in this cycle when increasing the key rate by a quarter point last month.

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Banco de Mexico downshifted its tightening campaign in December, raising rates by 50 basis points after four straight 75 basis-point hikes, with a promise to increase borrowing costs against in February.

Banxico’s board meeting on Thursday will be the first for new Deputy Governor Omar Mejia, a surprise pick whose nomination was confirmed by lawmakers last month. A former adviser to the five-member board who worked closely with Deputy Governor Galia Borja, Mejia replaces the dovish Gerardo Esquivel, who voted for a slower pace of tightening than fellow members in bank decisions in 2022.

Economists expect inflation to finish 2023 at 5.15%, according to a Citibanamex survey published this week, up from a forecast of 5.02% a month ago. They see interest rates at 10.5% at year-end, suggesting the bank will begin to cut later in the year, and expect the economy to grow 1%, up from a previous forecast of 0.9%.

Mexico’s government has implemented measures to rein in consumer price increases, recently extending an inflation pact focused on basic goods to ensure that there are affordable items on supermarket shelves.

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