Mexican Central Bankers Uneasy About Inflation Outlook

By Anthony Harrup Features Dow Jones Newswires

Although the Bank of Mexico is sticking to its forecast that inflation will return to its 3% target by the end of next year, several board members questioned the likelihood of that happening when they agreed in early November to leave interest rates unchanged, minutes to the meeting showed Thursday.

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The central bank voted unanimously on Nov. 9 to keep the overnight interest-rate target at 7%, noting that risks for both inflation and for economic growth had increased since the previous decision.

Several of the five voting board members said that a return to the 3% inflation target next year assumes minimal increases in noncore items, such as energy and fresh produce, a strengthening of the Mexican peso against the U.S. dollar, and a modest increase in the minimum wage.

Another member said inflation expectations gleaned from surveys and financial markets suggest the central bank's scenario "isn't altogether credible."

Risks the bank sees for the peso include possible interest-rate increases by the Federal Reserve, an unfavorable outcome for Mexico in negotiations to redraw the North American Free Trade Agreement, and Mexico's 2018 presidential elections.

Since the last policy meeting, labor, government and business representatives on the minimum wage commission agreed to raise the minimum wage by 10% as of Dec. 1, and inflation in the first half of November rebounded to 6.6% from 6.4% at the end of October.

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Bank of Mexico Gov. Agustín Carstens, who is leaving at the end of this month to head the Bank for International Settlements in Switzerland, said Wednesday that the minimum wage increase is likely to have an inflationary effect, but not enough to cancel out the wage increase. The central bank sees keeping low, stable inflation as its best contribution to raising real wages.

"For some companies, an increase in the minimum wage will imply a significant increase in costs and that could be reflected in increases in different prices," Mr. Carstens said.

Capital Economics said the surprising and broad-based pickup in inflation in the first half of November, reported Thursday, "will have spooked the more hawkish members of the board."

Markets have begun pricing in a good chance of an interest-rate increase in coming months, although inflation is still likely to ease over the next three to six months, the research firm said in a note. "So while rate cuts are clearly not coming onto the agenda anytime soon, we expect the central bank to look through the latest rise in inflation and keep rates unchanged at 7% over the coming months."

Write to Anthony Harrup at anthony.harrup@wsj.com

(END) Dow Jones Newswires

November 23, 2017 13:15 ET (18:15 GMT)