Mexico's headline inflation seen returning to target in early July - Reuters poll

Mexico's annual headline inflation likely slowed to 3.64% in early July, falling within the central bank's target range, yet core inflation is projected to accelerate to 4.30%, its highest level since mid-last year. This divergence, particularly the persistent core price pressure, is fueling expectations that Banxico will moderate the pace of its interest rate cuts, following a recent 50 basis point reduction to 8.0% and 325 basis points of cuts since early 2024.

Analysis

Mexico's inflation landscape presents a divergent picture for the first half of July, signaling a potential shift in the central bank's monetary policy trajectory. While the annual headline inflation is forecast to moderate to 3.64%, re-entering the central bank's target band of 3% plus or minus one percentage point, underlying price pressures are intensifying. Critically, core inflation, which excludes volatile items and is a key focus for policymakers, is expected to accelerate to 4.30%, its highest level since mid-2023. This persistent core inflation is likely to compel Banxico to adopt a more gradual approach to its easing cycle. The central bank has already cut its benchmark rate by 325 basis points in 2024 to its current 8.0%, but recent meeting minutes and a non-unanimous vote on the last 50-basis-point cut already indicated a move toward caution. This latest data reinforces the expectation that the pace of interest rate cuts will slow considerably, as the bank prioritizes taming resilient core price pressures.

Key Decisions for Investors

• Given that persistent core inflation is likely to force Banxico to slow its rate-cutting cycle, investors may find renewed support for the Mexican Peso (MXN) and should monitor the central bank's August 7th decision for confirmation of a more cautious stance.
• Holders of Mexican local currency bonds should anticipate that sticky core inflation may temper expectations for further aggressive easing, potentially putting upward pressure on short-term yields and warranting a review of portfolio duration.
• The conflicting signals between headline and core inflation introduce uncertainty for Mexican equities; therefore, it is prudent to await the official data release to confirm these trends before adjusting exposure to the local market.