BBVA Mexico revises GDP growth estimate downwards to 1.2% for 2022

In this context, in Mexico, headline inflation has remained high, while core inflation has continued to rise. Headline inflation stood at 7.29% YoY in the first half of March, a level marginally lower than at the end of 2021 (7.36% YoY). For its part, core inflation continued to rise, reaching 6.68% YoY in the first half of March, a level 0.72 percentage points (pp) higher than that observed at the end of the previous year. In qualitative terms, it is important to highlight that not only has core inflation maintained an upward trend, but also that pressures have intensified in the case of merchandise and have generalized to service prices.

From the end of 2021 to the first fortnight of March, year-on-year inflation of food merchandise increased 1.7pp (to reach 9.8% YoY), that of non-food merchandise rose 0.5pp (to settle at 7.1% YoY), while that of Services not associated with housing or tuition only rose an additional 0.2pp, but stood at 6.5% YoY. For its part, although non-core inflation has decreased with respect to the average levels of 11.3% YoY observed in the fourth quarter of 2021, during the first quarter of this year it has averaged 9.4% YoY.

According to the “Mexico Situation” report, going forward it is foreseeable that some global pressures will intensify, in particular the prices of raw materials, affected by Russia’s invasion of Ukraine, while it is also to be expected that the other factors that have affected inflation since the start of the pandemic will continue to affect it for longer.

In this context, a slower deceleration of inflation is expected during 2022-23, so headline inflation is forecast to average 6.3% in 2022, 0.6pp more than the 2021 average, but will show a gradual deceleration trend, from an average of 7.2% in 1Q22 to 5.6% in 4Q22. The study anticipates that core inflation will average 6.0% during 2022, 1.3pp above the average observed in 2021, but will show a slowing trend from the third quarter of the year -the average of 6.4% is expected in the second quarter is similar to the 6.5% of the first-, until averaging 5.3% in the fourth quarter. The institution estimates that the slowdown trend will accentuate in 2023 and that for the second half of that year, headline inflation will average 3.8% and core inflation 3.6%.

Monetary politics

In this context, and although a restrictive monetary stance is ineffective in counteracting the factors that continue to put pressure on inflation and that are not associated with general demand pressures -ie, effects on production chains and the increase in international prices of supplies-, it is expected that Banxico will continue to increase interest rates throughout the year until bringing the reference rate to a level of 8.0%.

With these increases, the central bank seeks to avoid a de-anchoring of long-term inflation expectations that would jeopardize the gradual slowdown trend forecast for inflation during the rest of this year and the next. Likewise, the analysis anticipates that in the second half of 2023, with core inflation c. 3pp below the current level and gradually converging with the 3.0% target, Banxico will begin a cycle of very slow cuts that would prevent the monetary stance from becoming much more restrictive. Therefore, the monetary rate is expected to be at 7.50% at the end of 2023, at 6.50% at the end of 2024, and at a neutral level (5.50%) at the end of 2025.

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