Bank of México raises inflation forecast from 6.2% to 6.8% for this year

The Bank of México (Banxico) has raised its annual inflation forecast for the fourth quarter of 2021 to 6.8%, a figure that would be the highest year-over-year increase in 20 years.

Included in a statement issued Thursday to announce that the central bank’s benchmark interest rate was increasing 25 basis points to 5%, the new prediction is 0.6% higher than the previous fourth quarter one made in September and well above the annual inflation target of 3% give or take a percentage point.

It came two days after the federal statistics agency INEGI reported that inflation last month was 0.84% compared to September, the biggest October hike since 1998.

Banxico said that inflation is rising not just in Mexico but around the world due to production bottlenecks, government stimulus, increases in the prices of food and energy sources and the reopening of some services.

“… Global and internal inflationary pressures continue affecting annual general and underlying inflation, which in October were 6.24% and 5.19%, respectively,” the bank said.

“The general and underlying inflation expectations for 2021 [and] the next 12 months … increased again, while the long term ones remain stable at levels above the target,” it said.

The Bank of México predicts that general inflation will fall to 6.3% in the first quarter of next year from the anticipated 6.8% rate between October and December of 2021. It forecasts that inflation will continue to fall quarter over quarter next year and into 2023, reaching 4.8% in Q2 of 2022, 3.9% in Q3 and 3.3% in Q4. The bank forecasts annual inflation will drop to 3.2% in Q1 of 2023, stay at that level in Q2 and decline to 3.1% in Q3.

It said its predictions are subject to a range of upside and downside risks, including external inflation pressures, underlying inflation persistence and depreciation of the peso in the former category and coronavirus restrictions and appreciation of the peso in the latter.

Economists at French bank BNP Paribas and economic research consultancy Pantheon Economics are more pessimistic than the central bank with regard to the outlook for inflation in the final quarter of 2021. The newspaper El Economista reported that their analysts are predicting annual inflation will be 7% this quarter.

Pamela Díaz Loubet of BNP Paribas and Andrés Abadía of Pantheon Economics predicted annual inflation of 4.5% and 4%, respectively, at the end of 2022. They said that their forecasts assumed that Mexico’s economic recovery, and consumer demand, will continue to be weak.

GDP slumped 8.5% in 2020 as the pandemic and associated restrictions ravaged the economy, and Banxico noted that preliminary data showed that there was a contraction in the third quarter of this year. However, the central bank said it expected growth to resume this quarter despite ongoing risks associated with the pandemic, the persistence of an “environment of uncertainty” and anticipated “slack” economic conditions.

With reports from El Economista