Mexico inflation eases less than forecast in July, rate hike seen

August 9, 2021

MEXICO CITY (Reuters) -Mexican annual inflation slowed to the lowest level in four months in July, but slightly overshot forecasts to stay well above the central bank’s target, supporting bets it will hike its key interest rate this week, official data showed on Monday.

Mexico’s national statistics agency INEGI said consumer prices increased by 5.81% in the year through July, above the consensus forecast of a Reuters poll for a reading of 5.77%.

The July reading was the lowest since March, and compared with a rate of 5.88% in June.

The Bank of Mexico, which will hold its next monetary policy meeting on Thursday, targets an inflation rate of 3%, with a one percentage-point tolerance range above and below that.

Expectations have been growing that Banxico, as the bank is known, could hike its benchmark interest rate for the second meeting in a row in a bid to contain price pressures in Latin America’s no. 2 economy.

“We expect supply-side shocks to fade in coming months, but core inflation will struggle to revert to target until the second half of next year,” said Joan Domene, senior economist at Oxford Economics.

The INEGI data showed that the index of core annual inflation, which strips out some volatile items, accelerated to 4.66%, the highest rate since the end of 2017. That figure was in line with the reading of the Reuters poll.

“We believe that Banxico’s June hike marked the start of a normalization cycle that will bring the policy rate to a terminal level of 5.25% by year-end,” said Domene, who forecast there would be rate hikes of 25 basis points at every monetary policy meeting until December.

Seventeen of 19 analysts surveyed by Reuters said they expect Banxico to raise the rate by 25 basis points to 4.50% on Thursday.

Compared with the previous month, headline consumer prices rose by 0.59% in July, while the core price index advanced by 0.48% from June, the data showed.

(Reporting by Dave Graham; Additional reporting by Anthony Esposito, Editing by Louise Heavens and Jonathan Oatis)