The ghost of inflation returns to Mexico under López Obrador’s government.

Banxico’s Board, unanimously cuts interest rate from 4.25% to 4%; the bank anticipates price index increases in the second quarter due to energy prices.

MEXICO CITY (El Universal) – Banco de México (Banxico) expressed its concern about the trajectory of inflation, particularly in energy prices -gasoline and LP domestic gas-. Banxico removed the monetary pause and decided to cut the reference rate by .25 points.

The Board unanimously decided to lower the reference rate from 4.25% to 4%, as expected by analysts and the market, which had not happened since September 2020, when the institution eased its monetary policy.

Banxico warned that increases in general inflation are expected in the second quarter of the year, mainly associated with the arithmetic effects of reducing energy prices last year.

It pointed out that the pandemic implies essential changes in relative prices and puts upward pressure on merchandise inflation. In January, it registered an increase of 5.41%, above the general average, and determined that the balance of risks of the expected inflation trajectory is uncertain.

Banxico noted as risks the pressures on core inflation due to the recomposition of spending, episodes of exchange rate depreciation, and impacts on costs for companies.

It pointed out that the risks to which inflation, economic activity, and financial markets pose challenges for monetary policy and the economy. Therefore, an orderly adjustment was necessary to change relative prices without affecting the price formation process and inflation expectations.

In the future, BANXICO said that the conduction of monetary policy depends on the evolution of headline and core inflation factors in their expected trajectories in the forecast horizon and expectations.

Fuel hike
On February 9, Inegi reported that the National Consumer Price Index (NCPI) rose 0.86% in January 2021 concerning the immediately preceding month, bringing annual inflation to 3.54%.

The most considerable variations were in the prices of Magna gasoline, with an increase of 6.06%, and LP gas, with 9%, both of which have a substantial weight within the CPI and are part of Mexico’s basic basket.

Given this, the Ministry of Finance and Public Credit reactivated the fiscal stimulus applied to fuels to avoid a gasolinazo after almost a year of not providing a subsidy.

Banorte analysts said that the statement emphasized the inflation “hump” that will be observed in the second quarter of the year due to an arithmetic effect, so it is expected that there will be a willingness to continue lowering the reference rate.