Overview of Recent Monetary Policy Changes
In their November monetary policy decision, Banco de México (Mexico’s central bank) made “moderate short-term changes” to their general and underlying inflation forecasts. They left unaltered their projection that inflation would fluctuate at 3.6% by the end of the third quarter, but slightly reduced their expectation that annual inflation would close out the last quarter of 2025 at 3.5%, down from the previously estimated 3.6% in September.
Current Inflation Data and Expert Predictions
The latest inflation data, up to the first half of October, indicates an annual variation of 3.63%. Financial experts surveyed by Citi recently anticipate that inflation will continue to rise, leaving the indicator at 3.80%.
Within the monetary policy announcement, members of Banco de México’s Governing Board revised upwards their estimate for underlying inflation, expecting it to end the final quarter of the year at 4.1% instead of the previously estimated 4% in September’s decision.
This indicator, known as “the purest inflation” by monetarists, excludes the most volatile price measurements.
For the coming year, Banco de México raised its inflation projections to 3.5% and 3.2% for the first and second quarters, from 3.4% and 3.1% in September. However, they maintained their projection that inflation would reach the 3% target by the third quarter of the following year.
Taxes on High-Consumption Products and Import Tariffs
Banco de México did not identify taxes on high-consumption products in Mexico, such as soft drinks, sweetened beverages, and import tariffs on products from countries without trade agreements as potential upward pressure risks.
Bank of America’s Chief Economist for Mexico and Canada, Carlos Capistrán, anticipates an inflation variation of 3.85% for this year and 3.59% for the next, indicating that he does not expect to reach the precise inflation target in 2026; Banxico projects it for the third quarter of 2026.
BNP Paribas’ Mexico Economist, Pamela Díaz Loubet, projects an inflation variation of 3.90% this year and an average of 3.60% for the next, stating that she expects the Consumer Price Index to be pressured in the initial months of the year by wage and import tariff increases, but without secondary effects.
Price Relative Corrections and Monetary Policy
Capistrán believes that inflation will not reach the target next year due to wage effects on final prices, particularly from consistent minimum wage increases.
Díaz Loubet interprets Banco de México’s communication as suggesting that in a weak economic activity context, restrictive monetary policy no longer supports efforts to lower inflation.
This implies, she says, that the disinflation process will come from price relative corrections and the normalization of service prices.
To achieve the precise inflation target in a weakening economy without restricting interest rates, well-anchored expectations and a credible downward inflation trajectory are necessary, according to Díaz Loubet.
Key Questions and Answers
- What changes did Banco de México make to its inflation forecasts? Banco de México made “moderate short-term changes” to their general and underlying inflation forecasts, slightly reducing their expectation for annual inflation by the end of 2025 from 3.6% to 3.5%.
- What are the current inflation data and expert predictions? The latest inflation data indicates an annual variation of 3.63% as of mid-October, with financial experts predicting it will rise to 3.80%.
- How did Banco de México adjust underlying inflation expectations? Banco de México revised upwards their estimate for underlying inflation, expecting it to end the final quarter of 2025 at 4.1% instead of the previously estimated 4%.
- What are the taxes on high-consumption products and import tariffs considered by Banco de México? Banco de México did not identify taxes on high-consumption products or import tariffs as potential upward pressure risks.
- What do experts predict for future inflation rates? Bank of America’s Chief Economist for Mexico and Canada, Carlos Capistrán, anticipates an inflation variation of 3.85% for this year and 3.59% for the next. BNP Paribas’ Mexico Economist, Pamela Díaz Loubet, projects an inflation variation of 3.90% this year and an average of 3.60% for the next.
- How do experts view the relationship between monetary policy and inflation in a weak economy? Both Capistrán and Díaz Loubet suggest that in a weak economic activity context, restrictive monetary policy no longer supports efforts to lower inflation. Price relative corrections and the normalization of service prices are expected to drive disinflation.
