(Bloomberg) — Mexico’s annual inflation slowed slightly less than expected in early January and remained far above target, leaving the central bank in a tight spot amid indications the economy is in recession.
Consumer prices rose 7.13% from a year earlier, compared to the 7.12% median estimate of economists surveyed by Bloomberg and 7.26% in the last two weeks of December, the national statistics institute reported on Monday.
Core inflation stood at 0.34%, above the 0.20% reading in the prior two-week period and the 0.26% increase expected by analysts, reinforcing the concern for policy makers who see it as a sign of lasting price pressures.
The central bank, known as Banxico, heads into its Feb. 10 meeting, the first under new Governor Victoria Rodriguez Ceja, amid conflicting signals over monetary policy. The benchmark rate is currently at 5.5% after five straight hikes including a half-point increase at its last decision on Dec. 16.
Alejandro Diaz de Leon, who stepped down as the bank’s chief last month, said in a Dec. 21 interview that Banxico isn’t committed to a pace of half-point hikes. But then a few weeks later Twitter comments by two board members highlighted sharp divisions over inflation, with one saying it’s easing while the other insisted quickening core prices looked like a “grave” problem.
Read more: Two Banxico Members Tussle on Twitter Over How to Read Inflation
The situation “continues to be very complicated,” Deputy Governor Jonathan Heath wrote on Twitter on Monday after the inflation data was published.
Two-year interest-rate swaps rose almost seven basis points on Monday following the inflation data release, marking the first increase in four days.
Today’s inflation statistics “merit an increase of 50 basis points,” said Valeria Moy, director of the think tank Mexican Institute for Competitiveness. “What the Banco de Mexico has to control, looking at these inflation figures, are the expectations.”
‘Stuttering’ Recovery
Complicating the bank’s task, preliminary data from the country’s statistics institute last week suggested that the economy’s third-quarter contraction continued through the fourth, putting Mexico in technical recession.
Last month, the bank forecast that inflation will slow to 3.5% by this December and reach its 3% target by the end of 2023.
Balancing the need to control inflation — the bank’s single mandate — on the one hand without further hobbling the economy on the other looms as a major test for Governor Rodriguez.
“A stuttering economic recovery will help to ease underlying inflation pressures over the coming months,” said Andres Abadia, chief Latin America economist at Pantheon Macroeconomics. “But challenging external conditions will make the bank particularly uneasy.”
(Added comment by deputy governor in sixth paragraph and swap rates in seventh.)
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