Mexico inflation still easing but rate cuts seen only next year

(Reuters) – Mexico’s inflation eased for the ninth consecutive month in October, data from national statistics agency INEGI showed on Thursday, remaining at its lowest since early 2021 ahead of a key central bank interest rate decision.

In Latin America’s second-largest economy, 12-month headline inflation hit 4.26% last month, down from 4.45% in September and the lowest since February 2021, although still above the central bank’s target of 3%, plus or minus one percentage point.

That makes it unlikely for Banxico, as the Bank of Mexico is known, to deliver any interest rate cut at its meeting later in the day, as the monetary authority has been citing a still complicated and uncertain inflationary outlook.

Consumer prices rose 0.38% in October, according to non-seasonally adjusted figures, mainly driven by core inflation including higher food, beverage and service costs.

“The fresh rise in services inflation will alarm officials at Banxico,” Capital Economics deputy chief emerging markets economist Jason Tuvey said in a note to clients.

“We doubt this will prompt a restart to the tightening cycle – interest rates are likely to be left unchanged later today – but there is a growing risk of rate cuts starting later and being even more protracted than we currently anticipate.”

Banxico has kept its benchmark interest rate at 11.25% since March following a nearly two-year rate-rise cycle during which it added 725 basis points of hikes to combat increasing consumer prices, which reached a two-decade high last year.

The annual headline inflation reading came in slightly below economist forecasts in a Reuters poll, which stood at 4.28%.

The closely monitored core index, which strips out some volatile food and energy prices, rose 0.39% during the month, while annual core inflation came in at 5.5%, in line with market expectations.

“This report strengthens our view that headline inflation will remain under control over the coming months,” said Pantheon Macroeconomics chief Latin America economist Andres Abadia, but “admittedly services inflation is still a bit sticky.

“Today’s core service numbers suggest that policymakers will likely delay the start of the easing cycle to mid-first quarter, once the disinflation story is broad-based,” he added.

(Reporting by Gabriel Araujo in Sao Paulo; Editing by Steven Grattan and Mark Heinrich)