Bank of Mexico says inflation taking longer than expected to descend

The upward revision in the forecast trajectory for inflation "is fundamentally due to the fact that core inflation has not shown favorable dynamics and has displayed more persistence than expected," Banxico said in its quarterly report.

The Bank of Mexico said on Wednesday that inflation is taking longer than initially anticipated to return to its target, in large part due to the persistence of core inflation.

Banxico, as Mexico's central bank is known, forecast that annual headline inflation would hit 4.9% in the fourth quarter of 2023, up from a prior projection of 4.1%. The upward revision in the forecast trajectory for inflation "is fundamentally due to the fact that core inflation has not shown favorable dynamics and has displayed more persistence than expected," Banxico said in its quarterly report. Core inflation strips out some volatile food and energy prices.

Inflation is now seen nearing Banxico's 3% target, plus or minus one percentage point, by the fourth quarter of 2024, a full quarter later than previously anticipated. Banxico has raised its key interest rate by 700 basis points since its rate-hiking cycle started in June 2021 to combat inflation.

The bank's five-member board voted unanimously last month to raise Mexico's benchmark interest rate by 50 basis points to 11.00%. The decision surprised analysts who expected a 25-basis-point hike.

Banxico said the board's next rate hike could be smaller given the hikes made so far. "The board considers that given the monetary policy stance already attained and depending on the evolution of incoming data, for its next policy meeting, the upward adjustment to the reference rate could be of lower magnitude," the report said.