LONDON (Reuters) - Inflation in Mexico is under control and the central bank has seen no evidence of second-round effects, but policy makers faced with a number of pressure points need to be very careful, the bank’s Deputy Governor Javier Guzman said.
Data for early March showed annual inflation soared at its fastest pace in nearly eight years. This prompted central bank chief Agustin Carstens to hint at higher interest rates to combat a “bubble” he expected to subside later in the year.
Faced with the peso tumbling to a series of lows until early this year, Mexico increased its benchmark interest rate for the fifth straight monetary policy meeting in March.
But policy makers slowed the pace of hikes from a string of half-percentage point increases to a quarter point after a rally in the currency.
Guzman, speaking on the sidelines of a meeting in London, said the bank’s main concern was the combination of factors including the peso weakening, a steep hike in gasoline prices, a rise in prices for agricultural products and an increase in the minimum wage -- all of which posed upside risks to inflation.
“In general we do not see evidence of second-round effect so... you could say the situation is under control. But on the other hand there are a number of upside risks so we have to be very careful,” he told Reuters.
Guzman said he expected those effects to be temporary with the inflation rate declining in the second half of 2017 before falling sharply next year due to base effects.
“By the end of next year, we will have an inflation rate close to the (bank‘s) 3 percent target,” he said.
Analysts expected inflation to stand at 5.6 percent by the end of this year and 3.82 percent by the end of next year, according to a central bank survey released on Monday.
Guzman added that, however, “there is always a risk of additional episodes of depreciation of the peso.”
The peso, which became a lightning rod for market anxiety given fears about the future of Mexican-U.S. trade relations, weakened more than 17 percent in 2016 - its fourth straight year of losses. But it has become one of the best performers this year, strengthening more than 10 percent.
Reporting by Karin Strohecker; editing by John Stonestreet