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Slowing Mexico Inflation and Growth Open Door to Larger Cut
(Bloomberg) -- Mexico’s inflation decelerated in early November while the economy continues to lose momentum, giving the central bank room to cut interest rates for a fourth straight meeting next month.
Official data published Friday showed consumer prices rose 4.56% in the first two weeks of November from the same period a year earlier, below the 4.65% median estimate of analysts surveyed by Bloomberg. The print was under the 4.83% reading in the previous two-week period.
In separate economic reports Friday, the statistics agency revised year-on-year third-quarter output to 1.6%, up from the 1.5% print in the third-quarter flash reading reported Oct. 30. Underscoring the loss of momentum at the end of the third quarter, GDP-proxy data for September fell to 0.29% from the same month a year earlier, below the 0.45% median estimate of economists surveyed by Bloomberg.
The closely-watched core inflation metric, which excludes volatile items such as food and fuel, slowed to 3.58% from 3.74% in the prior reading, below 3.71% median estimate. The central bank targets inflation at 3%, plus or minus one percentage point. When the preliminary data was released, growth data in the third quarter had been slightly better than economists had predicted.
“The good inflation print increases the chance that Banxico cuts 50bp in December,” wrote Kimberley Sperrfechter, emerging markets economist at Capital Economics, in a note. “Our base case remains a 25bp cut given the strong economic activity print in 3Q and upside pressure to US interest rates.”
The end of summer price adjustments turned electricity into the top item that contributed to inflation in this two-week period. The continued deceleration in services prices could also be an important factor for the central bank.
Mexico’s central bank, known as Banxico, in voting to cut its key interest rate for a third straight meeting last month, signaled a deepening concern over growth even as annual inflation has remained above target in the face of double-digit borrowing costs. An overall slowdown in Latin America’s second-biggest economy has analysts and investors pricing in additional cuts, but they are divided on how low policymakers are willing to go.
Banxico board members, led by Governor Victoria Rodriguez in their last meeting noted the sustained slowing of the core component, even though the balance of risks for the trajectory of inflation remained biased to the upside. They listed volatility in financial markets as one of the main global risks.
“All in all, we continue to believe Banxico will be able to increase the pace of cuts to 50bp as soon as at its next meeting in December, and take the reference rate down towards 7.50% before year-end 2025,” said Gabriel Casillas, chief of Latin America economics at Barclays Plc.
The central bank would likely proceed gradually but could accelerate the pace of easing if the Mexican peso stops depreciating against the US dollar, wrote Alberto Ramos, chief Latin America economist at Goldman Sachs & Co. LLC, in a note.
Mexico’s economic growth could face additional headwinds if US President-elect Donald Trump makes good on his threat to slap hefty, sweeping tariffs on products that Mexico exports to the US.
--With assistance from Rafael Gayol and Andrew Rosati.
(Updates to add GDP chart)