Mexico inflation ticks up in April, but rate cut hopes stay alive

Mexico’s annual inflation rate rose marginally in April, in line with market forecasts and supporting the idea that the central bank will continue its monetary easing cycle.

According to figures provided by the national statistics agency INEGI on Thursday, consumer prices grew 3.93% year-on-year, compared to 3.8% in March.

The figure fell well within the Bank of Mexico’s target range of 3%, plus or minus one percentage point, allowing policymakers to further reduce interest rates in the face of external economic headwinds.

The increase in inflation occurred as Latin America’s second-largest economy grapples with weakening economic prospects and increased uncertainty caused by global trade disputes.

While inflation is an important factor for Banxico, the central bank has been careful to balance its responsibility for price stability with broader worries about economic momentum.

Core Inflation continues a gradual rise

In April, headline inflation grew by 0.33%, while core inflation (excluding volatile goods like food and energy) jumped by 0.49%.

The 12-month core inflation index also increased to 3.93%, up from 3.64% the month before.

According to Reuters, the central bank’s key concern, core inflation, is now causing the wider index to rise, but it still remains inside the comfort zone.

Policymakers are watching this persistent trend of rising core prices closely to ensure inflation expectations stay anchored as they are taking the step of cutting rates.

Despite the spike, economists believe the trend aligns with central bank expectations and does not pose a risk to price stability.

Banxico sees further easing amid uncertain outlook

In March, Banxico dropped the benchmark interest rate by 50 basis points for the second time in a row, reducing it to 9%, the lowest level since September 2022.

The action marked a shift toward more accommodative monetary policy, aimed at bolstering the economy despite signs of slowing.

The next policy meeting is scheduled for May 15, and market participants anticipate another 50 basis point decrease, assuming inflation is contained and global conditions do not deteriorate materially.

Although Banxico’s statutory mandate does not include fostering economic growth, the weak domestic outlook, exacerbated by US tariffs and global trade uncertainty, has bolstered the case for further easing.

While inflation has not made significant progress toward the 3% objective, the data do not indicate a return of price pressures that would justify a stop in the current trend.

Analysts believe that as long as core inflation does not increase substantially, the central bank has ample room to continue its cautious rate-cutting plan.

External risks loom, but pressure remains contained

While the inflation landscape is quite benign, however, external risks are steep.

The uncertainty surrounding Mexican exports and industrial production is due, in large measure, to US trade policy, especially tariffs.

Such factors are likely to continue to be a drag on GDP growth over the next few quarters, which should only further justify easing monetary policy.

Currently, data suggests a gradual, data-dependent easing program.

The April numbers are slightly higher than March, indicating that inflation is under control.

This allows Banxico to boost the economy without jeopardising its primary objective.

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