Inflation Watch: Mexico, Brazil
Mexican statistics agency Inegi said consumer prices increased 0.61% in the first fortnight of November, with slightly higher-than-expected 0.19% core inflation.
Annual headline inflation came in at 4.56%, down from 4.87% two weeks earlier. Annual core inflation declined to 3.63% from 3.72%.
The decline in annual headline inflation was largely driven by weaker energy prices, with a sharp drop in LP gas prices taking 0.08pp off the CPI. There was also a slightly lower-than-expected increase in electricity prices.
"If it were not for a larger-than-anticipated increase in fruit and vegetable prices, inflation would have surprised more significantly to the downside," said Javier Amador of BBVA Research in a note. "Looking ahead, we expect headline inflation to fall further. Our preliminary monthly forecast for November (0.68%) would bring down inflation to 4.5% and biases our year-end 4.5% slightly to the downside (to 4.4%)."
BBVA Research added that the positive development implies that headline inflation is now again likely to drop below the 4.0% threshold around summer of next year.
"This would depend on the budget. If taxes are cut at the border, a drop should be expected in January. Yet, we should also wait to see how the upcoming government is going to proceed with gasoline prices next year," said Amador. "In any case, inflation is unlikely to be on the spotlight at the time of [central bank] Banxico's next policy decision. In spite of today's favorable print and the clear downward trend, the budget (and the MXN) still holds the key for December's call. An additional hike is still likely but is still not our base scenario. We will wait on the budget to make our final call."
"Much of the fall in inflation that we expect is likely to come in the second half of next year. Until then, inflation is likely to fluctuate around 4.5-5.0% y/y, above the upper-bound of the central bank's 2-4% target range," said Capital Economics' Latin America economist Edward Glossop.
"Moreover, the statement accompanying this month's decision to raise interest rates by 25bp was very hawkish, and signaled that further hikes were likely. For what it's worth, markets are pricing in an 85% chance of a hike," Glossop added.
BRAZIL
Consumer prices in Brazil rose 0.19% in the first half of November, slowing from 0.59% in the same period of October, statistic agency IGBE said in a release.
The accumulated inflation rate for 2018 reached 4.03% while the annual rate was 4.39%.
The central bank's annual inflation target for this year is 4.5%.
Capital Economics also commented on the Brazilian figures, saying the latest reading is not likely to have a major impact on monetary policy. The key interest rate, the Selic, is currently at a record-low of 6.5% and is widely expected to be raised at some point.
The UK-based firm said the central bank is likely to begin the hiking cycle when there is more clarity over the reforms of president-elect Jair Bolsonaro and when new central bank governor Roberto Campos Nieto is in his post. Bolsonaro will take office January 1 and Campos, who must be ratified by the senate, is likely to begin his tenure in January or early February.
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