Itaú BBA - MEXICO – 2Q20 Inflation Report: weaker activity outlook, with temporarily higher inflation

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MEXICO – 2Q20 Inflation Report: weaker activity outlook, with temporarily higher inflation

August 26, 2020

Inflation forecasts increased for 2020

The Central Bank of Mexico (Banxico) published its quarterly inflation report for 2Q20, decreasing further economic growth forecast for 2020. Banxico deteriorated its three economic outlook scenarios (which depend on the deepness and duration of the negative shock from Covid in GDP). For 2020 and 2021, the central bank expects GDP growth of -8.8% (before: -4.6%) and 5.6% (before: 4.0%); -11.3% (before: -8.8%) and 2.8% (before: 4.1%); -12.8% (before: -8.3%) and 1.3% (before: -0.5%), in a V, deep V and deep U scenario, respectively.

Short-term inflation forecasts increased, but convergence to the target is still expected for yearend 2021. Headline inflation expected for 4Q20 stood at 3.7% (from 3.5% in the last inflation report) but there was a slight reduction for 4Q21 to 2.9% (from 3.0%). The upward revisions in the short term projection reflect an increase in non-core inflation due to higher energy prices.  Meanwhile, core inflation projection increased slightly: 3Q20 (3.9%, from 3.8%); 4Q20 (3.8%, unchanged from last report) and 4Q21 (2.8%, from 2.6%). Despite the increase, Banxico continues to expect below target core inflation by the end of next year driven by the widening of output gap. As in the past inflation report, inflation forecasts reflect the median inflation outcome from the three activity scenarios listed above.

The balance of risks for inflation is still seen as uncertain (like in the last monetary policy statement), while more downside and upside risks to inflation were added to the list in the statement. On the downside risks for inflation (besides the widening of output gap, downward inflationary pressures worldwide, social distancing measures reducing demand for services) an appreciation of the currency and a reversion of the recent increase of the energy prices were added.  On the other hand, higher energy prices were included to the list of upside risk for inflation (the list already includes persistence in core inflation, further depreciation of the currency and supply/demand shock due to the outbreak).
We expect Banxico to deliver a 25-bp rate cut in the next monetary policy meeting (September 24). However, the odds of Banxico pausing the easing pace is increasing given the behavior of inflation and the guidance provided in the most recent statement, in which the board conditions the space for further easing to data.

Joao Pedro Resende
Julio Ruiz

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