Mexico's annual inflation likely accelerated in May, exceeding central bank target: Reuters poll

A Reuters poll indicates Mexico's annual inflation likely rose to 4.39% in May, exceeding the central bank's 3% target and complicating its efforts to lower interest rates amidst economic weakness; core inflation is also expected to have accelerated to 4.04%. The Bank of Mexico, which recently cut its key rate to 8.5%, will make its next monetary policy decision on June 26, facing a challenging environment of rising inflation and potential economic contraction.

Analysis

Mexico's annual inflation likely accelerated to 4.39% year-on-year in May, a notable increase from April's 3.93% and significantly above the Bank of Mexico's 3% target (plus or minus one percentage point), according to a Reuters poll of ten analysts. Core inflation, stripping out volatile items, is also anticipated to have risen to 4.04%. This resurgence in inflationary pressures, with May consumer prices expected to have edged up 0.23% month-on-month and core prices by 0.27%, presents a considerable challenge for the central bank. Despite cutting its benchmark interest rate by 50 basis points for the third consecutive time last month to 8.5%, its lowest since 2022, and previously signaling potential for further easing, the Bank of Mexico now faces a more complex scenario. The board had acknowledged continued economic weakness, and while a technical recession was avoided in Q1, the economy remains vulnerable to contraction. The upcoming monetary policy decision on June 26 will be critical, as policymakers must weigh the conflicting signals of rising inflation against a fragile economic backdrop, complicating the previously anticipated easing cycle. The official inflation data, due Monday, will be pivotal in shaping these deliberations.

Key Decisions for Investors

• Investors should closely monitor the official May inflation data release, as figures aligning with or exceeding the poll's forecast for a 4.39% headline rate could significantly temper expectations for further interest rate cuts by the Bank of Mexico.
• Consider re-evaluating exposure to Mexican assets, particularly those sensitive to interest rate changes and domestic economic conditions, given the increased risk that the central bank may adopt a more hawkish stance or pause its easing cycle to address persistent inflation.
• Anticipate heightened volatility in Mexican financial markets and the peso leading up to the June 26 monetary policy meeting, as the central bank navigates the difficult trade-off between controlling resurgent inflation and supporting a weakening economy.