Mexican Economy Continues to be Affected by Inflation

The Mexican economy faces a complicated outlook as inflation continues to increase, warns Banxico’s Board of Governors, which is trying to implement economic policies that address the continuously changing scenario.

During a meeting, Banxico’s Board of Governors agreed that contraction in economic activity during 4Q2021 was mainly caused by the fall of the service sector. Another member pointed to the decrease in mobility due to infections and others highlighted that the recovery remains heterogeneous between sectors. “One [member] added that economic weakness is manifested in the high percentage of sectors that still have not recovered their pre-pandemic level,” reads Banxico’s press release.

Core inflation has been continuously increasing for the past 14 months. In January, inflation reached a level not seen in 20 years, registering a historical peak since the current scheme for inflation targets was adopted. The trajectory of this component worries Banxico because it suggests that headline inflation could continue to present negative results in the medium term.

“The Governing Board evaluated the magnitude and diversity of the shocks that have affected inflation and its determinants, the risk that contaminate the expectations of medium and long terms and price formation, as well as the greatest challenges in the face of tightening global monetary and financial conditions,” reads Banxico’s press release.

The Governors decided to increase the target for the Interbank Interest Rate at one day by 50 basis points to hit the 3 percent target within the forecast horizon.

INEGI also reported that Mexico’s GDP suffered a major setback in 4Q2021 with only 0.1 percent growth. The country began to recover adequately in 2Q2021 with 19.9 percent growth, closing the year with a 4.8 percent annual GDP growth, as reported by MBN.