MEXICO CITY, Oct 29 (Reuters) - Mexico’s first economic contraction since a recovery began from the coronavirus pandemic poses a challenge to the central bank’s monetary policy tightening cycle, but stubbornly high inflation appears likely to take precedence, analysts said on Friday.
The Mexican economy shrank 0.2% here in the July-September period compared with the previous quarter after a resurgence in the coronavirus pandemic dragged down service sector activity and disrupted global supply chains, preliminary data showed.
The setback to growth provides ammunition to keep monetary policy looser to doves on the board of the Bank of Mexico (Banxico), which has been divided as it has carried out 25-basis point rate increases at each of its past three meetings.
However, headline inflation is at 6.1%, double the bank’s 3% target rate, and analysts on Friday reasoned that concerns over price stability would probably prove decisive in keeping rates ticking up given that growth is expected to fire up again.
Grupo Financiero Base forecast annual inflation would close 2021 at 6.6% and remain above 4% for the duration of 2022.
“That makes another interest rate hike of 25 basis point by the Bank of Mexico very probable and the possibility of two 25 basis point increases before the end of the year is not ruled out,” said Base economist Gabriela Siller.
Banxico Deputy Governor Jonathan Heath told Reuters here earlier this month the bank's tightening cycle is not yet over and one or two more increases are likely amid concerns about inflation.
However, he emphasized that any monetary policy moves would depend on incoming data.
Nikhil Sanghani, an analyst at Capital Economics, said the latest growth figures showed that “the weakness of the economy will probably ensure that Banxico’s tightening cycle remains gradual, and we expect another 25 basis point rate hike, to 5.00%, at its meeting in mid-November.”
Sanghani forecast growth of 6.0% in 2021 and 2.8% in 2022, slightly below the consensus view of private analysts surveyed in the Bank of Mexico’s latest monthly poll.
The Mexican central bank is due to convene for its next monetary policy setting meeting on Nov. 11. (Reporting by Anthony Esposito and Dave Graham Editing by Marguerita Choy)