The central bank targets inflation at 3%, plus or minus one percentage point. Image Credit: Reuters

Mexico’s annual inflation accelerated more than expected in March to its highest level in over two decades led by fuel prices, putting additional pressure on the central bank to continue boosting interest rates.

Consumer prices rose 7.45 per cent from the same month a year earlier, above the 7.38 per cent median estimate of economists surveyed by Bloomberg, the national statistics institute reported Thursday. On a monthly basis, prices rose 0.99 per cent, more than all the estimates by analysts, who had a 0.92 per cent forecast.

Core inflation, which excludes volatile items like fuel, rose 6.78 per cent last month from a year earlier, also above the median estimate of analysts and its fastest pace since April 2001. Sustained core price increases have particularly worried policy makers as a sign that elevated inflation in Mexico could be more persistent than previously predicted.

Mexico’s central bank has raised interest rates by 50 basis points in each of its last three meetings, and it is expected to continue increasing borrowing costs in order to tame inflation expectations. Last month, for the first time since its tightening cycle started in June, its members voted unanimously, to raise the key rate to 6.5 per cent.

Mexican headline and core inflation extended their uptrend in March. Pressure on food and fuel prices from new supply shocks spilt over to prices of other goods and services. Prices of tradable goods are increasing due to shortages and global inflation.

- Felipe Hernandez, Latin America economist

At the bank’s interest rate meeting last month, one board member argued the board should analyze whether ‘front-loading’ its hikes could curb inflation faster, according to meeting minutes published Thursday. The comment suggested the member could be willing to vote for a 75-basis-point increase - which would be the highest since bank started targeting an overnight rate in 2008. However, the other four members seemed more inclined to keep up the current tightening rate.

“I expect the next four hikes to be 50 basis points each,” said Carlos Capistran, chief economist for Mexico and Canada at Bank of America Corp., noting that there’s a possibility of a 75-basis-point hike. Although “the minutes show that at least one board member clearly supports a faster pace, but there is heterogeneity and other board members prefer gradualism.”

Mexico’s 2-year TIIE swap rate rose as much as 10bps to session high 8.76 per cent after March inflation data surprised on the upside, before trimming gains to 6bps following Banxico minutes. The curve now prices about 270bps hikes in the rest of 2022.

Banxico, as the central bank is known, says inflation would peak in the first quarter, then slow to 5.5 per cent by the year’s end. Yet economists have a more pessimistic view, with analysts surveyed by Citigroup’s local unit raising their 2022 inflation forecast to almost 6 per cent this week from 5.7 per cent two weeks earlier.

The central bank targets inflation at 3 per cent, plus or minus one percentage point.

“It’s more likely that price controls generate shortages of the goods for which they’re put into place than a reduction of prices,” said Pamela Diaz Loubet, a Mexico economist at BNP Paribas. “Food prices are rising because producers are facing higher costs, not because they’ve got excess profit margins.”

Mexico’s peso gained 0.3 per cent to 20.1057 per dollar in early morning trading on Thursday.