Mexico inflation reaches 20-month low

Consumer prices in Mexico fell more than expected in the first half of May, driving annual inflation to its lowest in 20 months, according to the first figures released after the central bank decided to pause interest rate hikes.

Prices decreased 0.32 per cent in early May, national statistics agency INEGI said on Wednesday, with 12-month headline inflation reaching its lowest since September 2021 at 6 per cent, helping the Mexican peso gain against the dollar.

The fresh data come as Banxico, as the local central bank is known, kept its benchmark interest rate steady at 11.25 per cent last week in a unanimous decision, breaking a nearly two-year rate-hike cycle.

The bank has suggested it might need to maintain rates at current levels for an extended period to bring inflation down to its 3 per cent target, which it does not see being reached until the fourth quarter of 2024.

Some economists, however, do not rule out rate cuts in 2023 in light of the latest inflation figures.

"The 5 per cent handle is within reach for headline CPI," Vaneck's chief emerging markets economist Natalia Gurushina said. "Banxico's pause is perfectly safe now, and there may even be room for cuts before year end."

Pantheon Macroeconomics' Andres Abadia said the data suggest Banxico's tone should start to change soon, opening the door for rate cuts in September or November, as inflation is "falling rapidly" and core inflation "finally edging lower".

Economists polled by Reuters had expected a 0.19 per cent drop in consumer prices in the first half of May, while the annual rate was seen reaching 6.15 per cent, down from 6.24 per cent the previous month.

Both actual figures came in below the lowest forecast in the survey, driven by lower energy tariffs as well as falling fruit and vegetable prices, according to INEGI.

The closely watched core price index, which strips out some volatile food and energy prices, climbed 0.18 per cent in early May, also below consensus of 0.21 per cent.

The annual core index hit 7.45 per cent, against a median forecast of 7.49 per cent.