Bank of Mexico says inflation taking longer than expected to recede

6:13 pm Wednesday, March 01st, 2023

By Brendan O’Boyle

MEXICO CITY (Reuters) -The Bank of Mexico said on Wednesday that inflation is taking longer than initially anticipated to return to its target, in large part due to the persistence of core inflation.

Banxico, as Mexico’s central bank is known, forecast that annual headline inflation would hit 4.9% in the fourth quarter of 2023, up from a prior projection of 4.1%.

The upward revision in the forecast trajectory for inflation “is fundamentally due to the fact that core inflation has not shown favorable dynamics and has displayed more persistence than expected,” Banxico said in its quarterly report. Core inflation strips out some volatile food and energy prices.

Inflation is now seen nearing Banxico’s 3% target, plus or minus one percentage point, by the fourth quarter of 2024, a full quarter later than previously anticipated.

Banxico has raised its key interest rate by 700 basis points since its rate-hiking cycle started in June 2021 to combat inflation.

The bank’s five-member board voted unanimously last month to raise Mexico’s benchmark interest rate by 50 basis points to 11.00%, surprising analysts who had expected a 25-basis-point hike.

Banxico’s report said the board’s next rate hike “could be of lower magnitude” given the hikes made so far.

“I want to emphasize that we will consider the monetary stance we have already reached. In this hiking cycle we already have an increase of 700 basis points accumulated in the interest rate,” said Banxico Governor Victoria Rodriguez, adding that the board will continue watching how inflation and inflation expectations evolve.

Deputy Governor Omar Mejia, the governing board’s newest member, said the interest rate was “close to reaching an adequate level,” echoing comments from an earlier interview published Wednesday.

Banxico will publish the decision of its next monetary policy meeting on March 30.

(Reporting by Brendan O’Boyle and Anthony Esposito; Editing by Isabel Woodford and Alistair Bell)