Mexico central bank holds fire despite rising inflation

Mexico’s central bank on Thursday maintained its benchmark interest rate at 4.0 percent, saying a jump in inflation was expected to be temporary as the pandemic-hit economy bounces back.

The Bank of Mexico has now left its inter-bank rate unchanged since February, following a series of cuts aimed at reviving Latin America’s second-largest economy.

“Inflation expectations for 2021 have increased,” it said in a statement, after consumer prices soared 6.08 percent in the year to April — the most since December 2017.

Inflation is expected to fall back towards the target level of around 3.0 percent from the second quarter of 2022, although there are risks it may overshoot, the central bank said.

“The implication is that the inflationary shock is temporary,” said Benito Berber, chief economist for Latin America at Natixis bank, who does not think policymakers are considering raising interest rates for now.

Whether that changes if inflation continues to rise “depends on how strong the shock is,” he added.

The Bank of Mexico reduced its benchmark lending rate 12 times between August 2019 and February, bringing it down from 8.25 percent to stimulate economic growth.

Mexico’s economy shrank 8.5 percent in 2020, according to official figures, in the worst slump since the Great Depression some nine decades ago.

The country of 126 million people has an official coronavirus death toll of nearly 220,000 — one of the highest in the world — but infections are now trending lower.

The central bank predicts economic growth of 4.8 percent this year, helped by an easing of pandemic restrictions and an economic recovery in the United States, a major trading partner.