Publishing Expected Rate Path Will Strengthen Downward Inflation Expectations: IMF

Bank of Mexico (Banxico) could start publishing its expectations about the path of the monetary policy rate to support its inflation forecasts, experts from the International Monetary Fund (FMI).

This measure will strengthen communication with the market and facilitate understanding of its strategy to slow down inflation.

By disclosing the first conclusions reached by the visit of the mission of experts from the FMI for the annual revision to Mexico, they underlined that the dissemination of these forecasts could also include their expectation on the terminal rate of the upward cycle.

Thus, when the expected path changes over time, it will provide valuable information on the central bank’s policy reaction and help as a guide to the market.

In the preliminary conclusions of the expert mission that visited Mexico, they explained that there is great uncertainty about the moment, speed and duration of the downward trajectory of inflation in 2023.

Therefore, a risk management strategy would help argue for the effective restriction of rates to mitigate upside risks and affirm inflation expectations at the 3 percent target.

In the analysis they highlighted that the world inflation and internal will be more persistent if there is a greater increase in international oil or food prices or if the expected slowdown for the United States becomes more pronounced.

No public support, double digit inflation

In the conclusions they recognized the impact of the fiscal measures implemented to mitigate the inflationparticularly those that have helped stabilize fuel prices.

They estimated that this strategy subtracted at least two percentage points from the annual variation of the inflation, which is currently at 8.70 percent. This means that without gas and gasoline subsidies, inflation would be in the double digits.

The Fund’s experts estimate that the financial strategy that has allowed the government to fund this subsidy has cost the equivalent of 1.4 points of GDP; resources that have been obtained from extraordinary income due to the high oil price.

However, they highlighted that international oil prices are volatile by nature and in the current geopolitical context, they become a factor of vulnerability for the budget for the future.

market intervention

After acknowledging the positive impact that government intervention measures have had on fuel prices, they pointed out that they caused a kind of disruption in demand.

That is to say, the perception of more stable prices has favored the user to keep their demand for fuel unchanged and at times when the international price stabilizes or begins to slow down, the user in Mexico does not perceive it.

They state that the budgetary cost of the measures applied to try to measure the increase in food prices is not so easy to quantify.

And they warned that the increase in the minimum wage, which would be the fourth consecutive year since the administration began, could create upward risks for inflation.

Especially when assuming that the government has promised to continue with this salary adjustment for the next two years.

After the visit to Mexico, where the economic and financial authorities opened their books to experts from the FMIwithin the framework of the Annual Review in accordance with Article IV of the Constitutive Agreement, warned that the growth prospects for Mexico are tilting downwards while those of inflation are trending upwards.

The complete conclusions, with specific recommendations from the IMF experts and the authorities’ response, will be disclosed between the end of October and the first days of November.

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