Mexico Central Bankers Strike Cautious Tone on Inflation Trends

(Bloomberg) -- Mexico’s central bank urged caution on the inflation outlook in the minutes to its June interest rate meeting, which one board member called “one of the most complex decisions of the monetary cycle.”

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The central bank, known as Banxico, kept rates unchanged for a second straight month at 11%, near a record high, on June 27. One member described the “increased uncertainty, fueled by idiosyncratic and external shocks” in the minutes of that gathering published on Thursday.

Banxico’s decision, influenced by persistent inflationary pressures and muddled by market volatility after June’s presidential election, was split, with Deputy Governor Omar Mejia backing a quarter-point cut while the other four policymakers voted to hold. In the minutes, most members suggested the weaker economy partly offset the exchange rate volatility and also pointed out that part of the peso adjustment has been reversed.

Banxico in March finally joined Latin American peers in cutting interest rates as consumer prices eased across the region. Still, since then Mexico’s annual inflation readings have sped up for four straight months.

The bank has paid strong attention to the services component of inflation, which has remained sticky while other aspects of consumer prices have improved.

“Given the current environment of high uncertainty and financial volatility, a reference rate cut would come as a surprise to most market participants and could increase exchange rate volatility and raise inflation expectations,” one member wrote, adding that a pause would help keep price forecasts anchored.

Another member agreed it was “appropriate on this occasion to extend the pause in order to continue assessing both the disinflation process and the monetary policy transmission mechanism,” adding that the key rate may have a lesser effect on long-term bonds in an environment of greater uncertainty.

A third member said that there should be “a downward trend in services inflation, a substantial improvement in inflationary expectations, and that convergence to the projected inflation target by the end of 2025 materializes” before the board could fine-tune the reference rate.

Deputy Governor Jonathan Heath said on Tuesday that June’s inflation figures are “very concerning.”

Consumer prices rose 4.98% that month from a year earlier, above the 4.87% median estimate of analysts in a Bloomberg survey, and also the 3% target.

On the other hand, core inflation, which excludes volatile items such as food and fuel, slowed to 4.13%, slightly below the 4.14% median estimate, maintaining a downward trajectory that’s also closely watched by the central bank.

In an interview after June’s decision, Banxico Governor Victoria Rodriguez Ceja said progress in the disinflation process, along with restrictive monetary policy, will allow board members to discuss key rate cuts in coming meetings.

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