The Central Bank of Mexico (Banxico) published its quarterly inflation report for 1Q23, recognizing a slowdown in core inflation although it remains at a high level. Core inflation has been aided mainly by lower core goods index, while core services CPI is pressured by the accumulated shocks. The report emphasized that Banxico’s inflation forecast paths have been adjusted only slightly when comparing to the latest monetary policy decision (same as the 1Q23 inflation report) versus the one in March and February.
Stronger activity outlook for this year but softer for the next. The central bank GDP growth forecast for 2023 increased to 2.3% (previously at 1.6%) due to better-than-expected activity in 1Q23. However, for next year GDP growth forecast came down to 1.6% (previously at 1.8%) as the central bank expects a deterioration of industrial production in the US. The central bank expects the output gap to remain in negative territory in 2023 and 2024.
The report included a box suggesting inflation persistence increased. While core inflation has started to ease, high inflation inertia could imply challenges for the deflationary process. With several statistical estimates, the analysis shows there is a higher inflation persistence in the period Feb 2002 - Mar 2023 than a period that excludes the pandemic Feb 2002 - Feb 2020. The increased persistence could be explained by the magnitude and duration of the shocks that affected prices during the pandemic and geopolitical conflicts.
In the press conference, the governor of the central bank suggested rate cuts are not discarded in 2H23. When explaining the forward guidance of a prolonged period of stable rates, the governor indicated they will take a time longer than two monetary policy decisions to assess inflation evolution and decide when to cut the policy rate. However, the head of Banxico emphasized they don’t have a specific time lapse before starting the easing cycle.
Our terminal policy rate forecast is at 11.25%, which implies no rate cuts this year. However, we don’t discard rate cuts by the last quarter of this year depending on the evolution of core inflation.
Joao Pedro Resende