Mexico’s Accelerating Inflation Raises Odds of Bigger Rate Hike

(Bloomberg) — Mexico’s annual inflation accelerated more than expected in early April driven by food, gasoline and vacation costs, putting pressure on the central bank to consider bigger interest rate increases.

Most Read from Bloomberg

Consumer prices rose 7.72% in the first two weeks of the month from a year earlier, compared with a 7.63% median estimate in a Bloomberg survey, the national statistics institute reported Friday. Prices rose 0.16% from the previous two weeks, more than double what economists expected.

Core inflation, which excludes volatile items like fuel, rose 7.16% from a year earlier, in a period that included the Easter break spending. Sustained increases in core price have particularly worried policy makers as a sign that inflation could be more persistent than previously predicted.

“Overall, this is a bad start to the second quarter, mostly due to increased commodity prices, lingering supply issues, and the reopening of the economy,” Andres Abadia, chief Latin America economist for Pantheon Macroeconomics, wrote in a research report.

The data is even more troubling this month given that “historically, bi-weekly inflation in any first half of April is negative because of the implementation of summer discounts on electricity tariffs,” said Gabriel Casillas, chief economist for Latin America at Barclays Plc.

Banxico, as the central bank is known, has raised interest rates by 50 basis points in each of its past three meetings, and it is expected to continue increasing borrowing costs next month in order to tame a deteriorating inflation outlook. In March, its members voted unanimously for the first time since its tightening cycle started in June, raising the key rate to 6.5%.

Story continues

Analysts now say that the bank could accelerate the pace of hiking to 75 basis points at its next meeting, especially given the stubbornly high core component of inflation. The bank targets inflation at 3%, plus or minus 1 percentage point. It projected that prices would peak in the first quarter and then slow to 5.5% by the end of the year.

“The last minutes suggest that some members have thought about the possibility of adjusting the pace of increase,” said Pamela Diaz Loubet, a Mexico economist for BNP Paribas. “Banxico is shifting from a gradual focus, in which it is data-dependent, to one that requires a more blunt response to control inflation.”

Central Bank Governor Victoria Rodriguez Ceja said Thursday she sees an “additional challenge” for the bank, predicting the U.S. Federal Reserve will boost the pace of its rate hikes. Banxico normally follows Fed rate increases to avoid abrupt outflows of capital from Mexico.

Read More: Mexican Central Bank Braces for Faster-Than-Expected Fed Hikes

The Fed hiked by a quarter percentage point when beginning its tightening cycle in March and many traders now expect a half-point rise in its next two meetings.

Accelerating inflation is a growing challenge for the government of President Andres Manuel Lopez Obrador, who has used oil price windfalls at state energy giant Petroleos Mexicanos to subsidize fuel costs for consumers. The Finance Secretary estimates that it can keep a balanced budget even if oil prices spike to $155 per barrel.

(Updates with analysts comments starting in fourth paragraph.)

Most Read from Bloomberg Businessweek

©2022 Bloomberg L.P.