Bank of Mexico's chief expects jump in inflation to be fleeting
By Anthony Esposito
MEXICO CITY, Aug 12 (Reuters) -The Bank of Mexico's governor, Victoria Rodriguez, told Reuters that she expected a recent jump in headline inflation to be short-lived and if that forecast turned out to be valid, further interest rate cuts could be in the cards.
Some analysts had criticized Banxico, as the Mexican central bank is known, for lowering its key rate by 25 basis points to 10.75% last week in a divided vote by its five-member governing board even as it signaled expectations for higher inflation than previously anticipated.
Rodriguez and deputy governors Galia Borja and Omar Mejia voted in favor of the cut, while board members Irene Espinosa and Jonathan Heath were against.
Regarding the possibility of implementing future interest rate cuts, Rodriguez said in an interview late on Sunday that she "believed the degree of restrictive monetary policy stance will need to be adjusted according to the development of the inflationary outlook."
The slumping Mexican peso, which earlier this month weakened to a nearly two-year low versus the U.S. dollar, is seen fueling inflation, and Banxico has pointed out that the possibility of a further depreciation of the local currency is an upside risk to inflation.
The currency, once dubbed the "super peso," could weaken further to 21 pesos per greenback, analysts surveyed by Reuters said last week, from about 18.8 currently. That would be a far cry from 16.25 pesos in April, its strongest level in nearly a decade, as growing capital inflows to Mexico buoyed the currency.
In recent days, the peso has been hit by a wave of liquidations, especially in Asian markets, while the specter of controversial reforms to Mexico's constitution set for votes next month, including a potential judicial overhaul that would subject judges to popular vote, has also weighed on the currency.
However, weaker-than-expected economic activity in Mexico has helped to offset the impact of the weaker currency, Rodriguez said.
"We expect economic activity during the remainder of the year to continue to grow but at a more moderate pace," Rodriguez said.
The divided vote over reducing the key rate by a quarter of a percentage point came as consumer price data for July showed that annual headline inflation rose to 5.57%, surpassing June's rate of 4.98%, as a result of a significant increase in the non-core component.
"The forecast we have is that in the short term, in the coming quarters the shocks that have impacted non-core inflation will dissipate, and that allows us to anticipate a decline in headline inflation soon," Rodriguez said.
In its monetary policy statement on Thursday, Banxico upwardly revised its forecast for year-end annual headline inflation to 4.4% from 4.0% previously. Still, it maintained its expectation for inflation to reach its 3% target, plus or minus a percentage point, in the fourth quarter of 2025.
Rodriguez said she expected the disinflation process in Mexico to continue.
"We have made important progress, however we still face challenges to bring inflation to target ... we'll do what is necessary to promote the orderly and sustained convergence of headline inflation to its 3% target," said Rodriguez.
Reporting by Anthony Esposito; editing by Jonathan Oatis
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