MNI INTERVIEW2 - Inflation Rebound Due To Shocks-Banxico Mejia

The recent rebound in Mexican inflation was caused by one-off shocks and doesn't appear to reflect a trend as it was concentrated in only a few components, Bank of Mexico Deputy Governor Omar Mejia told MNI, adding that this view is consistent with the 50-basis-point cut to 8.00% last month.

"Our forecast is always subject to shocks. However, we are currently in a better position because some of those shocks have started to fade, and although uncertainty remains, it hasn’t necessarily been inflationary," Mejia said in an interview at his office in Mexico City.

The increase in inflation seen in the early months of the year came largely in non-core prices and can be largely explained by agricultural products, as a result of weather and animal diseases, he said.

"These types of shocks tend to dissipate naturally as production conditions normalize," said Mejia. (See MNI EM INTERVIEW: Banxico Mulling More Gradual Policy - Mejia)

Last month’s 50-basis-point rate cut was part of a monetary policy calibration process, he said.

"There may be shocks, but I believe our responsibility as central bankers is not to overreact to a single data point, but to explain the nature of those shocks and whether or not they affect the forecast, in what way, and for how long," he said. 

EXTERNAL RISKS

Regarding external risks, Mejia said U.S. President Donald Trump's trade policy could have mixed effects on inflation, with peso depreciation posing an upside risk, while lower activity could exert downward pressure on prices.

"So far, we’ve seen weak economic activity. There was a recent rebound, likely due to front-loading by the U.S., which may reflect preventive purchases and imports, but overall, economic conditions remain weak," Mejia pointed out.

As for the risk of a sharper depreciation of the peso, Mejia said this has not materialized during the first half of the year.

"Overall, it [U.S. tariffs] does not appear to be inflationary, because the elements that have materialized so far tend to push inflation down, such as weaker economic activity, and the depreciation risk has not materialized, as the peso and the exchange rate have behaved in an orderly fashion," he said.

While the overall risk balance still has an upward bias, downside risks have also started to become more pronounced, he noted.