Mexico Core Inflation Slows as Markets Eye Another Interest Rate Cut

(Bloomberg) -- Mexico’s headline inflation quickened near expectations in October while a closely-watched core measure slowed, likely keeping the central bank on track for another interest rate cut next week.

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Official data released Thursday showed consumer prices rose 4.76% from a year prior, just above the 4.74% median estimate of economists surveyed by Bloomberg. The central bank, which holds its next rate-decision meeting on Nov. 14, targets annual inflation of 3%, plus or minus 1 percentage point.

Core inflation, which excludes volatile items such as food and fuel, ticked down to 3.8%, below the 3.85% median estimate. The view among most analysts is that economy will down shift in the final months of the year and maintain a trend of cooler core readings going forward.

Policymakers at Banco de Mexico have lowered borrowing costs at the last two meetings and are widely expected to continue the easing cycle with a third straight quarter-point cut to 10.25%, the highest among Latin America’s big economies. Analysts in the most recent Citi survey expect that Mexico’s gross domestic product will grow only 1.5% in 2024. Combined with a slowdown in the US, it may provide the central bank with more leeway for easing.

What Bloomberg Economics Says

“With core inflation slowing in line with central bank forecasts and activity and domestic demand moderating, policymakers are likely to look through the higher headline print. We expect another interest-rate cut next week and forward guidance to signal more if data warrant. Volatility after the US election is the main risk.”

— Felipe Hernandez, Latin America economist

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Higher prices of fruits and vegetables, which climbed 4.29%, and a jump of 1.95% in energy costs drove October’s monthly inflation. Meanwhile, livestock prices fell 0.18%, the statistics agency said.

The peso has whipsawed since Donald Trump clinched a second term this week. The president-elect has promised to slap steep tariffs on Mexico’s goods if the government doesn’t stem migration headed toward the US border.

The swings so far are unlikely to alter central banker’s plans, said Carlos Capistran, chief economist for Canada and Mexico at Bank of America Securities.

“Core inflation well below 4.0% means that Banxico will continue cutting despite currency volatility,” he wrote in a research note.

In August, Banxico, as the central bank is known, reduced its own 2024 growth forecast to 1.5%. Board members have since warned of the uncertainty brought about by the US election and other international factors, according to the minutes of the last rate decision.

“Frankly, the possibilities that Banxico doesn’t cut are low,” said Jessica Roldan, chief economist at Casa de Bolsa Finamex. “Ever since the last decision, the majority of the board has had a tone that made clear that there was going to be a reduction cycle, instead of isolated reductions.”

--With assistance from Rafael Gayol.

(Adds analyst comments in fifth paragraph.)

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