Itaú BBA - MEXICO – 3Q19 Inflation Report: Lower GDP growth forecasts and higher short-term core inflation

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MEXICO – 3Q19 Inflation Report: Lower GDP growth forecasts and higher short-term core inflation

Novembro 27, 2019

Core inflation projection shows a delay in its deceleration trend, compared to the past inflation report

The Central Bank of Mexico (Banxico) published its quarterly inflation report for 3Q19, decreasing economic growth forecast for 2019 and 2020. The GDP growth forecast range for 2019 fell to -0.2-0.2% (from 0.2-0.7% in the last report) and for 2020 was decreased to 0.8-1.8% (from 1.5-2.5%). The report, also included a growth forecast range for 2021 which stood at 1.3-2.3%. The balance of risks for growth was kept tilted to the downside.

Core inflation projection shows a delay in its deceleration trend, compared to the past inflation report. The quarterly average annual core inflation for 4Q19 and 1Q20 stood at 3.6% (before: 3.5%) and 3.6% (before: 3.4%), respectively. After 1Q20, core inflation decelerates, converging to 2.9% in 4Q20.  According to the report, core inflation revision was associated to higher than expected core inflation data and the expected effect from the update in the excise tax of sugary drinks and tobacco (will come into effect next year). Looking forward, after 1Q20, the widening of slack conditions will exert downward pressure to core inflation.  In turn, headline inflation stood at  3.0% in 4Q19 (before: 3.2%) and 3.0% in 4Q20 (unchanged from last report). 

The report kept the same tone (“uncertain”) on the balance of risks for inflation (compared to the monetary policy statement of the most recent decision). Moreover, the report mentions the same risks for inflation and in the same order. 

Weak economic activity and low headline inflation gives room for the central bank to continue easing monetary policy. However, a clear core inflation deceleration trend seems to be a necessary condition for the three board members that voted for a 25 bp cut in the latest monetary policy decision (the rest of board members voted for a 50 bp cut) to vote for a larger rate cut. In this context, core inflation forecast upward revisions reduce the odds of a 50-bp rate cut in December.  

João Pedro Resende
Julio Ruiz



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