The Central Bank of Mexico (Banxico) published its quarterly inflation report for 4Q22, with a similar cautious tone on core inflation recent evolution as the most recent monetary statement. The report noted that core inflation is still not showing an inflection point to the downside, also noting that the 50-bp rate hike surprise in February (Bloomberg consensus expected a 25-bp rate hike) was decided given a worse than expected inflation scenario. Core goods food inflation slowed less than expected and remains at a high level, while services CPI was higher than expected.
The report also included a box analyzing the behavior of long-term inflation expectations. Long-term inflation expectations remain relatively anchored (moderate upward adjustments) in the recent period, but the bimodal distribution of the survey is now biased towards higher inflation. Comparing a January survey in 2021 and 2023, the analysis noted that in both years the higher density of the bimodal distribution was between 3.5-3.6%, but in January 2021 the other peak of the distribution was biased towards 3%, while in the January 2023 survey the other peak was biased towards 4%.
Inflation forecasts were kept unchanged (relative the most recent statement), but GDP growth for this year and the next was reduced. The central bank GDP growth forecast for 2023 and 2024 stood at 1.6% (previously at 1.8%) and 1.8% (from 2.1%), respectively. According to the report, the downward revision in GDP is due to a worsening of activity outlook in the U.S., particularly its industrial sector. However, internal demand is expected to keep supporting Mexico’s economy. The balance of risk for growth remains biased to the downside.
Our terminal policy rate forecast is at 11.50%, which implies two 25-bp rate hikes more (March and May). Looking ahead, we think that the central bank will only start cutting rates during the first half of next year.
Joao Pedro Resende