MNI BANXICO PREVIEW - Close Call Cut

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MNI Banxico Preview Feb 2021.pdf

State Of Play: Mexico's economic activity continued to recover in Q4, but was still below pre-pandemic levels. Q4 GDP grew in line with estimates at 3.1%. The reading was considerably lower than the 12.1% relief recovery in the previous quarter and may provide evidence of tailwinds losing momentum. This has been exacerbated in recent weeks by the intensification of the Covid outbreak and the curtailing of reopening measures, both negatively impacting domestic demand. Delays in receiving Pfizer vaccines have also added an obstacle for the vaccine timeline and logistics.

Inflation figures rose in January with the headline annual CPI reading at 3.54% and the core reading creeping higher to 3.84% y/y. The latest set of data was an additional indication of resilient upward pressure on core merchandise prices and subdued services tariffs. Accelerating non-core inflation due to energy prices and base effects is no surprise. It is in line with central bank forecasts for headline inflation to rise above the ceiling of the 3% +/- 1 percentage point target in H1 and fall thereafter. Moreover, in the latest central bank survey the median expectation for headline 2021 inflation rose by just 6bp, to 3.66%, but remained flat for 2022 at 3.50%.

Financial market conditions are still favourable. The exchange rate and sovereign credit spreads have consolidated the gains from previous months and remain near their strongest levels since the outbreak. Fiscal stimulus to the economy has been scarce and with this expected to remain the case, pressures on monetary policy intensify. The labour market continues to exhibit significant slack in the system. From December's readings, a shocking 9.4 million individuals of working age were classified as outside the active labour force but were available to work.