Mexico early-January prices exceed market forecasts, rate hikes expected

MEXICO CITY, Jan 24 (Reuters) – Mexico’s headline inflation accelerated and beat expectations in early January, data from the national statistics agency showed on Tuesday, marking the first monthly pick-up since September as markets brace for fresh interest rate hikes ahead of us.

Annual headline inflation reached 7.94% in the first half of the month, beating the 7.77% recorded in December and economists’ forecasts of 7.86%, although still below the two-decade high rate of 8.70% registered in August and September.

Meanwhile the core index, which strips out some volatile food and energy prices, hit 8.45% on an annual basis, returning to the rise after showing some relief in December. It also beat forecasts by 8.34%.

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That means annual inflation remains well above the target rate of 3%, plus or minus one percentage point set by Banxico, as the Bank of Mexico is known.

Jonathan Heath, a Banxico bank board member, said on Twitter that the consumer price data showed “domestic pressure, possibly from increases in labor costs.” Heath pointed out that Mexico still has “a lot to worry about” when it comes to inflation.

In an effort to mitigate rising prices, Banxico increased its prime lending rate by 650 basis points to 10.50% during the current hiking cycle, which began in June 2021.

Banxico is considering another interest rate hike at its next monetary policy meeting on February 9, according to the minutes of its last board meeting – a move already expected by the markets, including a possible hike higher than as expected.

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The latest headline inflation figure, Capital Economics economist Jason Tuvey, said “there is a growing risk that Banxico will deliver a bit more tightening beyond the 25bp increase to 10.75% we expect at the February meeting.”

Banxico is unlikely to make any interest rate cuts in the next six months, Heath said in an interview last week.

In the first half of January, according to the statistics agency INEGI, consumer prices rose by 0.46% compared to the previous two-week period, and the core index rose by 0.44%, both more than the estimates of the market too.

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“We still believe that a decline in domestic fundamentals, lower raw material prices and improving global supply conditions will reduce inflation in the coming months,” said Pantheon Macroeconomics economist Andres Abadia.

“But today’s numbers suggest that Banxico will remain particularly hawkish in the short term.”

Mexico’s Latin American peer Brazil, where monetary tightening is on hold, released mid-month inflation data on Tuesday, with prices slightly beating market forecasts.

Reporting by Brendan O’Boyle and Gabriel Araujo; Additional reporting by Anthony Esposito; Editing by Steven Grattan and Andrea Ricci

Our Standards: The Thomson Reuters Trust Principles.

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