The Bank of Mexico warns the high level of underlying inflation in the country as a risk

The high level of subjacent inflation in Mexico is the focus of the Central Bank’s concerns. According to the minutes of its most recent meeting of its monetary policy published this Thursday, the institution revealed that, although general inflation in the country has been lower, the escalation of prices, which does not consider energy or fresh foods due to its high volatility, has surprised by its upward trend. “The inflationary environment continues to be complex and uncertain,” the minute refers to. Faced with this scenario, the members of the central bank called for maintaining a forceful monetary policy, as well as the rate of increases observed previously. On February 9, the central bank voted unanimously for an increase of 50 basis points to set the interest rate at an unprecedented level of 11%.

In the document —where the arguments are presented without identifying the speaker— all the members of the board agreed that the inflation of merchandise remains high and that its decrease has been gradual, especially that corresponding to food merchandise. One of the members explained that food inflation continues to be above 14% at an annual rate, not only due to external pressures, but now also due to internal effects. “The majority pointed out that the domestic prices of these merchandise seem to face asymmetric effects of the shocks, since the decrease in the pressures of international references is not being transferred to the final consumer at the same speed as that observed with the upward pressures,” indicates the minute.

One member pointed out that the evolution of core inflation is a reason for Banco de Mexico to act with even more caution. The member of the central bank expressed his concern that the balance of risks for inflation continues to be biased upwards and considered that the disinflation process will be more difficult than anticipated. “Given the unfavorable dynamics of inflation, especially the core component, it is prudent for the increase in the reference rate at this meeting to maintain the pace of the previous decision.” The restrictive policy followed by Banco de Mexico is against the background of runaway inflation that is barely showing signs of easing: annual headline inflation stood at 7.76% during the first 15 days of February, a slight fall compared to the 7.88% that was observed in the second half of January. However, core inflation during that period was 8.38%.

Credit in Mexico overcomes an environment with high interest rates

According to the banking report prepared by BBVA in Mexico, last year was marked by an increase in inflation and interest rates, with a consequent increase in volatility in financial markets. The study outlines that the recovery of financing to the private sector has been supported by the greater flow of financing to households. Credit within households is due, in turn, to a sustained growth in bank credit, both for consumption and for housing. At the end of 2022, the balance of credit to households resulted in average annual growth in real terms (excluding inflation) of 5.3% for the consumer portfolio and 3.3% for the housing portfolio.

Regarding the use of financing flows, the public sector remains the main user with almost 40% of the total flow, while, as already mentioned, the private sector has registered a recovery. The weakest component continues to be that of financing to companies, whose annual flow in terms of Gross Domestic Product in the third quarter of last year was 50% below the average registered between 2010 and 2018.

In short, higher-than-expected economic growth in 2022, coupled with the spending of excess liquidity accumulated during the pandemic, supported private consumption and, with it, motivated the growth of credit to households, particularly through cards and credit cards. payroll loans. However, the analysis recognizes that the persistence of high interest rate levels could affect the performance of banks. The delinquency of the consumer credit portfolio, for example, was 2.9% in 2022, at the same level as in the housing portfolio, on average, default was 2.6%.

Carlos Serrano, chief economist at BBVA Mexico, explains that inflation normally affects consumer credit to the extent that it erodes real wages. In Mexico, the nominal wage is growing and this has made consumption resilient despite the increase in Interest rates. “There are types of credit that are more sensitive to rate increases, automotive credit, which we believe is increasing demand, and in general credit for durable consumer goods and particularly business credit, which are normally determined in short-term variable rates”, specific.