MEXICO – 2Q21 Inflation Report: cautious inflation outlook

Our base case scenario is for a 25-bps rate hike in September

Julio Ruiz


The Central Bank of Mexico (Banxico) published its quarterly inflation report for 2Q21 keeping unchanged the inflation projections published in the most recent (August) monetary policy statement (but higher than the 1Q21 inflation report). Headline annual inflation forecast path stood at 5.6% in 3Q21 (from 4.5% in the previous inflation report) and 5.7% in 4Q21 (from 4.8%), while core inflation projection was set at 4.7% in 3Q21 (from 3.9%) and 5.0% in 4Q21 (from 3.9%). According to the report, upward revisions to core inflation were the result of supply shocks (supported by several analysis across the report) which imply higher upward risk for price formation, in the context of a gradual recovery of the economy. Looking ahead, both headline and core annual inflation are expected to slow down to 3.4% and 3.3% in the last quarter of 2022, respectively.

At the same time, the inflation report reflected a more positive activity outlook for 2021. Banxico increased its central GDP growth scenario for 2021 to 6.2% (compared to 6.0% in the last inflation report), with a lower and upper bound of 5.7% and 6.7%, respectively. The GDP growth revision in 2021 is explained by a higher than anticipated growth in the 2Q21, while given the vaccination campaign progress and further reopening of the economy a reactivation of activity is expected during the second half of the year. Still, the report noted the persistence of disruptions in the global supply chains (microchips) and the resurgence of the outbreak are downside risk to the economic outlook.

The report includes a box detailing the recent IMF SDR (USD 12 billion) allocation to Mexico, suggesting the federal government can only tap SDR’s by buying them with its own resources.  The central bank noted that while the FX commission (composed of members of the central bank and the ministry of finance, with the latter having the majority) determines the use of the international reserves, the central bank law limits the type of operations that can be made. For instance, Banxico is allowed to sell/buy currency with the treasury (with resources of its own and at market prices), but it is not authorized to transfer, lend or give away the SDR’s.  

All in all, the report reflects a cautious inflation picture which is consistent with our base case scenario of a 25-bp rate hike (likely in another 3x2 split vote) in the September meeting.  Still, a pause is not discarded (August minutes revealed that among the three members who voted for a rate hike, one of them is considering a pause). We expect an end of year rate of 5.25%, which implies a 25-bp rate hike in the three remaining meetings of 2021.

Joao Pedro Resende
Julio Ruiz