3 Minutes to Read Reuters, MEXICO CITY, July 13 – Despite the Bank of Mexico raising its benchmark interest rate last month to combat rising inflation, analysts now expect Mexican inflation to reach around 6% by the end of the year, more than double the central bank’s target. At its monetary policy meeting on June 24, Banxico, as the central bank is known, unexpectedly hiked the benchmark interest rate by 25 basis points to 4.25 percent, citing the need to avoid unfavorable effects on inflation expectations and mentioning price formation in the United States. Higher inflation “is compatible with a broader reopening of the economy, with relative prices still gradually adjusting following the strong distortions generated by the epidemic,” according to a report by Banorte, which boosted its inflation forecast for 2021 from 5.5 percent to 6.1 percent. Annual consumer price inflation in June was 5.88 percent, significantly over Banxico’s target rate of 3 percent plus or minus one percentage point, as Latin America’s second largest economy recovers from the effects of the coronavirus pandemic. Rising international oil costs, as well as upward pressure on core prices, which exclude some volatile food and energy items, are generating higher headline inflation, according to analysts. Many of the forces driving increased inflation, according to the government and Banxico, are temporary or related to the pandemic. “On the back of sustained increases in airfares and restaurants, core services is the main source of concern,” said Gabriel Lozano, chief economist for JPMorgan’s Mexico business, which raised its inflation forecast to 5.8% from 5.6 percent. Entertainment, hotels, and housing are also putting upward pressure on pricing, according to Lozano, who expects Banxico to raise rates two more times in 2021. A weakened Mexican peso and the economic impact of a severe drought in Mexico, according to Banxico, could intensify inflationary pressures. In recent days, Citibanamex, Invex, and Monex have boosted their inflation projections to around 6%. “Inflation in 2021 will be among the highest in recent memory,” according to Marcos Arias, a Monex economist. (Abraham Gonzalez contributed reporting; Anthony Esposito wrote the story; Chizu Nomiyama edited it.)/n
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