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Banxico is likely to pause in the May’s 18 meeting.

Headline CPI fell by 0.02% mom in April (from 0.54% a year ago and a five-year median figure of 0.05%), broadly in line with our forecast of -0.01% and market expectations of -0.04% (as per Bloomberg). Downside pressure to headline CPI came mainly from the non-core component (-1.25%) dragged by volatile fruits and vegetables and energy inflation (gas prices and a seasonal subsidy to electricity tariffs). Core inflation stood at 0.39% mom in April (from 0.78% a year ago and a five-year median figure of 0.37%), slightly below both our forecast and market consensus of 0.41%.


On annual basis, headline inflation fell to 6.25% yoy in April (from 6.85% in March) aided mainly by the non-core component (2.12%, from 3.27%). Likewise, core annual inflation fell to 7.67% (from 8.09%) aided by core food (12.14%, from 12.95%) and non-food (6.59%, from 6.93%) subindexes. Core services inflation fell to 5.46% yoy in April (from 5.71% in March), although we note that in 2H April it stood at 5.51% yoy (from 5.41% in 1H April). Our diffusion index, looking at the percentage of items with annual inflation above the upper bound of the central bank target, stood at still high 77.3% in April.

At the margin, headline and core inflation slowed in April. Using seasonally adjusted figures, the three-month annualized measure of headline inflation was 3.87% in April (from 4.43% in March), while core prices fell to 5.55% (from 7.16%). 

Core inflation sub-indexes developed by the central bank, which help to break down the effect of supply (currency, wages and energy prices) and demand shocks (output gap) on prices, indicate that inflation closely associated with the output gap (fundamental inflation) fell to 6.23% in April (from 6.74% in March). The components of core inflation affected by energy commodity prices, salary and currency also slowed to 7.80% in April (from 8.23% in March), 6.34% (from 6.37%) and 7.48% (from 7.93%), respectively.

 In our view, April’s figure is consistent with the central bank pausing at a rate level of 11.25% in the May 18 monetary policy meeting.  A strong currency and the Fed signaling a pause ahead are factors also supporting our call. We expect the policy rate to remain unchanged throughout the year.

Julio Ruiz