Mexico’s central bank stuck to its guidance and held its benchmark interest rate steady at 7 per cent as policymakers bet consumer prices – despite ticking higher in July – are near their peak.
The bank brought its aggressive hiking cycle to a close in June when it lifted rates by a quarter point and said that rates at 7 per cent were consistent with reaching its inflation target of 3 per cent, plus or minus one percentage point.
The national consumer price index hit 6.44 per cent in July, above market expectations but BBVA Bancomer analysts noted that core inflation showed signs of stabilisation, coming in at 0.27 per cent in July, the third consecutive month that the monthly rate is at or below 0.3 per cent.
“These figures suggest that exchange rate passthrough is waning and so the risks of second-round effects on prices,” the bank said in a note to clients. “Besides, this stabilisation of the core component suggest that the peak of inflation is close. We expect inflation to trend downwards after the summer and more clearly during the fourth quarter and thereafter giving Banxico more room to hold rates.”
Indeed, BBVA predicted the rate would remain on hold for the rest of the year and well into 2018, highlighting a more gradual Fed normalisation and “feeble” domestic Mexican demand as other reasons to sit tight.
Eighteen market analysts surveyed by Reuters had also expected a hold.