Itaú BBA - MEXICO – 4Q19 Inflation Report: Lower GDP growth forecasts and slightly higher inflation

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MEXICO – 4Q19 Inflation Report: Lower GDP growth forecasts and slightly higher inflation

Fevereiro 26, 2020

The balance of risks for inflation was kept as uncertain

The Central Bank of Mexico (Banxico) published its quarterly inflation report for 4Q19, decreasing economic growth forecast for 2020 and 2021. The GDP growth forecast range for 2020 fell to 0.5-1.5% (from 0.8-1.8% in the last report) and for 2020 was decreased slightly to 1.1-2.1% (from 1.3-2.3%). According to the report, economic activity revisions were due to a lower than expected GDP base in 2019 (after the weak 4Q19 figure), in a context of soft global economic activity. The balance of risks for growth was kept tilted to the downside, mentioning the coronavirus outbreak as one of the downside risks to economic outlook.

Banxico increased its inflation forecast path moderately due to the recent hike in the minimum wage and higher than expected non-core agro price projections. The quarterly average annual headline and core inflation forecasts for 4Q20 were increased to 3.2% (from 3.0% in the last inflation report) and 3.0% (from 2.9%), respectively, while 4Q21 forecasts stood at  3.0% and 2.9%, respectively. The revision in inflation forecasts reflect higher than expected non-core agro price projections, which are partly offset by the expectation of lower energy prices. Moreover, the projection path reflects the recent hike in the minimum wage in 2020 and the widening of slack conditions. Finally, compared to the last monetary statement, the balance of risks for inflation was kept as uncertain and risks were almost unchanged, adding only the coronavirus outbreak as one of the factors affecting the currency. 

The report included an analysis of the impact of the minimum wage hike on inflation. The analysis concludes that the effect of the 2019 minimum wage hike (which was 16% and 100% at the national level excluding northern frontier and northern frontier, respectively), compared to a scenario of a minimum wage hike of 5%, resulted in an effect of 42 bp in headline inflation. The study also warned that additional minimum wage hikes could have a higher impact than estimated in this analysis.

We expect the policy rate to end this year at 6.00% (currently at 7.00%), with the next rate cut of 25-bp in March’s policy meeting. The widening of slack conditions exerts downward pressure on inflation, supporting gradual rate reductions. However, persistent core inflation and risks associated with domestic policies (minimum wage hike) may prompt the central bank to space out the cycle with pauses at certain points this year.

 

João Pedro Resende
Julio Ruiz



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