Low-inflation wave reaches Mexico

January 22, 2015

A Mexican soccer fan watches a large screen broadcasting the 2014 World Cup soccer match between Mexico and Cameroon, in downtown Monterrey

Just as ECB President Mario Draghi announced a massive bond-buying program to revive Europe’s economy and fend off deflation fears, news of shockingly low inflation popped up elsewhere in the globe: consumer prices in Mexico dropped 0.19 percent in early January, far below all 19 forecasts in a Reuters poll.

That was the biggest surprise in Mexico’s mid-month inflation data in more than four years, according to Reuters poll data. The 12-month rate dropped sharply to 3.08 percent, from 4.08 percent at end-2014, converging to the central bank’s 3-percent target several months earlier than expected.

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The recent round of central bank activism – from Switzerland to Canada and Peru and so forth – raises the question of whether this means Mexico will be the next to cut rates in a hurry. UBS economists Rafael de la Fuente, Guilherme Loureiro and Thiago Carlos say this remains unlikely as Mexico does not seem to need further economic stimulus.

But low inflation does make potential rate hikes much less probable for now.

“It is early to draw any hard conclusions from today’s inflation data, but from the standpoint of Banxico the perceived urgency to consider early rate hikes, ahead of the Fed even, should no longer be on the cards,” they wrote in a note.

Mexico’s inflation surprise also draws immediate comparisons with Brazil, where the central bank raised its benchmark rate by 50 basis points on Wednesday to an eye-popping 12.25 percent.

The Brazilian central bank, fighting to win back investor confidence after years of perceived tolerance with high inflation, looks completely out of sync with its counterparts, especially as the economy grinds to a halt and risks entering a recession in 2015.

With a brief post-decision statement, the bank kept all options open for its next meeting in March, though economists expect another rate hike, albeit smaller, to 12.50 percent.

The best thing that could happen for Brazilian policymakers before the week is over would be to get the same kind of surprise in mid-month inflation data due out on Friday.

But that sounds unrealistic. The most likely scenario is quite the opposite, with 12-month inflation spiking to the highest in more than 3 years, at 6.75 percent, after an increase in electricity and bus fares.

And it might get even worse: according to Credit Suisse’s calculations, inflation will top 7 percent in all months of 2015, far above the official target of 4.5 percent.

“The central bank is paying the price for the wrong bets it did in the past,” said Enestor dos Santos, a BBVA economist in Madrid.

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