The Mexican peso weakened against its US counterpart in the middle of the trading week as the inflation rate surged more than the median estimate. This comes as policymakers hold their March policy meeting to decide whether to slash interest rates or hold them steady. The peso has been one of the worst-performing currencies this year, and very little could support it in the short-term.
Mexico’s national statistics institute reported that inflation increased 0.53% in the first two weeks of March, higher than the market forecast of 0.33%. This is also up from 0.23% in the first half of February. Year-over-year, the mid-month inflation rate increased 4.12%, higher than economists’ expectations of 3.91%.
The core inflation rate, which eliminates volatile food and energy, clocked in at 0.35%, nearly double the consensus of 0.21%.
Higher inflation data come as the Bank of Mexico holds its monetary policy meeting. The main topic will be interest rates. Before the inflation reading, it was widely expected that officials would cut interest rates for the 13th time since August 2019. However, now that inflation inched higher, it would be challenging for Banxico to ease policy.
For now, surveys show that officials will hold the line and keep interest rates at 4%. That said, market observers are penciling in a total of a hike of 80 basis points by the end of the year.
This has become such a critical meeting because the latest numbers show that Mexico’s economy plummeted 8.2% in 2020, the biggest annual decline in nearly a century. Monetary easing has been one of the few instruments to keep the economy afloat.
But the government thinks the national economy could easily recover this year. Finance Minister Arturo Herrera told students at the National Autonomous University of Mexico (UNAM) that Mexico’s gross domestic product (GDP) “could easily grow above 5.0% in 2021.
On the coronavirus front, Mexico continues to see improvement. At the same time, the seven-day average continues to hover around 5,000 new infections. In total, the Mexican government has reported 2.2 million cases and a death toll of 199,000.
The USD/MXN currency pair rose 0.24% to 20.8897, from an opening of 20.8475, at 19:17 GMT on Thursday. The EUR/MXN was unchanged at 24.6925.