High levels of inflation may take hold, warns Banco de México

Most of the members of the Banco de México Governing Board consider it necessary to strengthen the monetary stance by adjusting it so that inflation approaches the target, but “some” consider that its persistence for a prolonged period may take root.

According to what was described in the minutes of the decision announced on September 30, when they raised the rate to 4.75%, “a” member of the Board asserted that if the tension in inflation continues, “even” could seek “a position slightly restrictive ”, which would be more consistent with the current inflationary gap and with the narrower Gross Domestic Product (GDP) gap.

The dissenting vote of Deputy Governor Gerardo Esquivel was based on his perception that “a higher rate does not resolve the factors that originate inflationary pressures.”

That is, it considers that the increase in the rate does not impact on the increase in international prices of inputs or on disruptions in supply chains.

One of the members of the Board warned that the continuation of high levels of inflation could untie medium and long-term expectations if they are maintained for a prolonged period. In addition, it would lead to economic agents incorporating them into their expectations and pricing.

Another member commented that in addition to supply shocks, inflation also faces various structural factors that would limit the decline in prices in the following months.

Underlying, with pressures

He himself argued that inflationary pressures point to a structural and inertial problem in core inflation that can hardly be considered transitory.

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Core inflation is the measurement that discounts the prices of products and services that tend to present volatility due to seasonal effects or administrative decisions. Core inflation completed 10 consecutive months on the rise in September.

Consumption patterns affected

In the minutes of the penultimate monetary announcement of the year, one of the members of the Board stated that the change in consumption patterns is only one time and warned that this pressure will begin to subside as the normalization process advances.

Another noted that, on the contrary, there will be greater pressures as the economic reopening progresses.

Some added that in addition to external inflation pressures, there are internal factors that are fueling upside risks.

One added the risk of further increases in agricultural prices. One more mentioned that the inflation of food merchandise is highly correlated with that of the United States, which would explain a dynamic of higher prices in the northern regions than in the north-central region of the country.

The strong dissent

Deputy Governor Esquivel, who has remained firm in his dissent during the last three rate increases, argued that by increasing the rate, “the future space for when the Fed begins the process of normalizing its rates is reduced.”

“To anticipate too much the process (of normalization) could imply that in the future the rate must be taken to a very restrictive terrain,” Esquivel warned.

The next money announcements are scheduled for November 11 and December 16. They will be the last where Alejandro Díaz de León will participate as governor of the Bank of Mexico

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Hardened tone

Strategists at BNP Paribas and Goldman Sachs noted that the minutes show a tougher tone against inflation that may anticipate a couple more rate hikes.

The economist for Latin America at Goldman Sachs, Alberto Ramos, identified the position of the five members of the Board.

One of them, the toughest in the Dovish position (indicates an expansionary policy where the central bank relaxes rates) considers that the tightening is ineffective in several aspects.

A second limb is slightly tame and does not seem inclined to support additional hikes. He clearly said: “strengthening the monetary stance does not mean a cycle of interest rate hikes.”

The other three members are hawkish, calling for a decisive monetary response and are more open to further raising the rate.

The economist for Mexico at BNP Paribas, Pamela Díaz Loubet, does not see much cohesion among the members who gave the majority to continue with more than one increase the rest of the year.

In September, annual inflation rose to 6%, double the specific goal of Banxico and spun seven months outside the target range. For its part, the underlying index, which is the one closely followed by the central bank to make decisions, reached levels not seen since August 2017, at 4.92 percent.

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