Banxico Alerts Inflation Spikes

Banxico has considered that inflation risks are on the rise, according to their last governing board meeting. This is due to exchange rate depreciation, costs in the supply chain and droughts in the agribusiness industry. In the first half of May, annual inflation reached 5.80 percent, reported the National Statistics Agency (INEGI).

Banxico mentioned that inflation risks are linked to the possibility of higher external inflation, reallocation of public spending, possible exchange rate depreciation and the increment in transportation costs in production chains that translate into higher prices of imported inputs. 

In addition, the governing board alerted about the impact on agricultural production due to droughts, which would pressure non-underlying inflation. As previously reported by MBN, the country experienced an extensive drought and several forest fires that affected nearly 84 percent of the Mexican territory. Claudia Sheinbaum, head of Mexico's City government, described it as the worst drought in 30 years.

Banxico remarked the importance of understanding that inflationary pressures are mainly transitory. During April, the inflation rate reached an all-time high since 2017 as it grew 6.5 percent in annual terms reported INEGI.

BBVA's latest report mentioned that "inflation would have peaked in April, and as the transitory effects unwind, we think that the headline inflation rate will drop down to slightly above 4.0 percent levels in 3Q2021, before rebounding temporarily again in 4Q2021 to above-4.5 percent levels. Core inflation is set to gradually fall to below 4.0 percent levels in the next few months," reported MBN.  

The bank reports that global economic activity continues to recover at different rates among countries and sectors due to the economic crisis caused by COVID-19 and the tightening of financial conditions. Although, the governing board expects optimistic growth forecasts for the rest of the year since the pace of recovery is likely to accelerate due to external demands. These are mainly due to the increase of the remittances, the consumer confidence index that signals the recovery process of private consumption in the following months and the combination of the USMCA that could stimulate investment.

Banxico's monetary policy objective is to maintain yearly inflation at 3 percent and the bank previously implemented an interest rate reduction policy to control inflation. As previously reported by MBN, the board of Banxico decided in March, in an unanimous decision, to place the interest rate at 4 percent as the bank expected an increase in consumers' prices. Due to this reason, the board has continued to support the monetary policy to maintain the interest rate, which is the lowest level that has been set since 2016.