Itaú BBA - MEXICO – 3Q20 Inflation Report: slightly higher inflation for 2021, but additional rate cuts are sti

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MEXICO – 3Q20 Inflation Report: slightly higher inflation for 2021, but additional rate cuts are sti

November 25, 2020

Doubts over how persistent is the recent fall in inflation.

The Central Bank of Mexico (Banxico) published its quarterly inflation report for 3Q20, increasing slightly the inflation forecasts for 2021. Headline annual inflation forecast 4Q20 fell slightly to 3.6% (from 3.7% in the last inflation report) due to a lower expected path of non-core inflation (lower energy prices), while core inflation forecast was kept unchanged at 3.8%. For 4Q21, headline and core inflation forecasts increased slightly to 3.3% (from 2.9%) and 3.1% (from 2.8%), respectively. The adjustment in the headline inflation forecast for 2021 is explained by a higher upturn in energy prices (after the foreseen slowdown in 4Q20), while the revision in core inflation is explained by a less wide output gap and recent upside surprises, which offset the “Buen Fin” (Mexico’s Black Friday) effect and a stronger currency. 

According to the central bank is still difficult to evaluate the persistence of the recent fall in inflation (1H November) driven by the “Buen Fin”. A potential persistence of the effect of the “Buen Fin” was included in the list of downside risks for inflation. In this context, the inflation report mentions the persistence of “Buen Fin” effect will be more clearly observed in the coming months. The balance of risks for inflation remains uncertain (like in the most recent monetary policy statement). 

The balance of risks for growth continues to be biased to the downside. Banxico now publishes a central scenario for GDP growth with ranges, compared to the last inflation report in which several scenarios were published depending on the deepness and duration of the negative shock from Covid in GDP. For 2020, Banxico expects GDP to fall by 8.9% with a range between -9.3% to -8.7%, while for 2021 the central bank expects a positive growth of 3.3% (with a range between 0.6% to 5.3%). 

We expect Banxico to keep its policy rate unchanged at 4.25% in the last monetary policy meeting of the year (December 17), but to resume the easing cycle as soon as 1Q21 (we see three additional 25-bp rate cuts next year). However, given the strong performance of the Mexican peso and lower-than-expected inflation (albeit linked to one-off factors), we can´t rule out that the central bank will reinitiate the cycle already next month.  

Joao Pedro Resende
Julio Ruiz

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