Banxico will deal with core inflation "uncomfortably high"

“General inflation remains uncomfortably high, it has not dropped much from its highs and that is the great challenge that Banxico still faces. As long as (inflation) does not stabilize within the targets, it will be difficult for us to see rate cuts.” , said Ramsé Gutiérrez, co-director of Investments at Franklin Templeton Mexico, in an interview.

Core inflation has been pressured, according to Gutiérrez, by services that have risen due to higher wages and adjustments to the prices of their products.

For inflation to continue to fall, the central bank should continue raising the interest rate at least on one more occasion to leave it at 11.5%, according to analysts.

Banxico highlighted in its monetary policy statement this Thursday that the headline inflation figure will rise slightly in the second and third quarters of 2023.

“The fact that we see less variation in the forecasts may be a reflection that the uncertainty is beginning to dissipate in some way,” said Alejandro Saldaña, chief economist at Grupo Financiero Ve por Más (Bx+).

The economist highlighted that although long-term expectations remain, the bad news is that they are still outside the central bank’s target range of 3%. Banxico anticipates that it will reach this level until the fourth quarter of 2024 and early 2025.

Nearshoring, in addition to attracting investment, can have a counterproductive effect on inflation. “If Mexico has slightly higher growth than expected by nearshoring, it is more difficult to achieve inflation targets,” said Victor Ceja, chief economist at Valmex.

When will Banxico stop raising rates?

The Valmex specialist highlighted that there are signs that the interest rate is close to the limit and proof of this is the bankruptcies of banks in the United States.

“In the United States, although Jerome Powell (president of the Fed) commented that there would be an increase of more than 25 base points, the markets are discounting that this increase may no longer occur because there could be more damage to other banks,” said Ceja.

In the case of Mexico, which has a delayed effect of monetary policy for almost a year, the increase in rates could come later.

“In our opinion, the cycle should stop at 11.5%, beyond that level there could be an impact on economic growth not immediately but later, perhaps in 2024,” he added.

And the dissenting voices?

The analysts highlighted that the unanimity of the members of the Governing Board to raise the interest rate remains to be seen in the minutes, which will be published in two weeks.

Saldaña said that it will be interesting to read the discussion among the members of the Board and it will allow them to know the positions of Deputy Governor Omar Mejía.

“It will be very interesting to see the details of the discussion, also to gauge a little the inclinations of Sub-Governor Mejía. It will take us a little time to get to know his inclinations a little,” Saldaña added.