The Central Bank of Mexico (Banxico) published its quarterly inflation report for 2Q23. In our view, the tone of the report is similar to the most recent monetary policy statement, maintaining caution on the disinflationary process, and emphasizing the forward guidance of keeping the policy rate unchanged for a prolonged period of time.
The central bank is more bullish on activity. Their 2023 GDP growth forecast was increased to 3.0% (from 2.3% in the previous report), and to 2.1% for 2024 (previously at 1.6%). The upward GDP growth revision in 2023 reflects stronger than expected activity in 1H23, which also improves the statistical carry-over for 2024. We also note that their central estimate of the output gap is slightly positive now in the 2Q23.
Inflation forecasts were unchanged from the most recent monetary statement (August 10). Likewise, the balance of risks for inflation was kept tilted to the upside, referencing the same risk factors as the policy statement.
In the press conference, Banxico's governor repeated the forward guidance on rates. The governor noted that they need to keep the policy rate unchanged for a “prolonged period”, without specifying a time horizon, in order to see a consolidation of the disinflationary process. She added that disinflationary processes are not linear and are subject to volatility,
The odds of the central bank delaying the easing cycle are increasing. Our base call of a 25-bp cut in November (reaching an end of year policy rate of 10.75%) may be pushed forward as some core inflation components are not still clearly trending down and amid a still cautious Board. While core goods annual inflation continues falling (although still at a high level), persistence in core services inflation remains.