The Governing Board of Banco de México increased the forecast for consumer inflation for the fourth quarter of 2021 from 5.6% to 5.8%.

It also increased the target for the overnight Interbank Interest Rate by 25 basis points to a level of 4.75%, with effect from October 1, 2021.

They add that the forecasts for headline and core inflation were revised upwards in relation to those previously published, considering the characteristics of the shocks that have affected them, the greatest increases correspond to the short-term forecasts.

Global inflationary pressures and production bottlenecks continue to affect headline and core inflation, which registered annual variations of 5.87% and 4.92% in the first half of September, respectively.

The expectations of headline and core inflation for 2021 increased again, for the next 12 months and for 2022 they also increased, while those for the long term have remained stable at levels above the target.

They also foresee that the annual measurement of headline and core inflation will decrease especially after one year and that it will converge to the goal of 3% towards the end of the forecast horizon, third quarter of 2023 and that, from the second quarter of 2022, located at levels of 4.2%.

They add that these forecasts are subject to risks. Among the upside risks are external inflationary pressures, cost pressures, persistence in core inflation, exchange rate depreciation and increases in agricultural prices.

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Among the downward forecasts are the widening of the negative output gap, greater social distancing, and exchange rate appreciation.

The balance of risks with respect to the forecast path for inflation in the forecast horizon is upward.

The shocks that have affected inflation are expected to be transitory, due to the diversity, magnitude and extended horizon in which they have affected it; however, they may imply risks for price formation and inflation expectations.

They state that global economic activity continued to recover, although at a slower pace and with heterogeneity between countries due to the availability of vaccines, the evolution of the pandemic, and spending stimuli.

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Global inflation continued to rise due to pressures on raw material prices, base comparison effects, bottlenecks in production, as well as support for spending and its recomposition towards merchandise.

In the main advanced economies, central banks have maintained monetary stimulus, although some already foresee its reduction, while in various emerging economies they continue to reduce it. Global risks include those associated with the pandemic, inflationary pressures, and adjustments to monetary and financial conditions.

In the national financial markets, the exchange rate has increased its volatility and interest rates have increased. The recovery of the Mexican economy continued during the third quarter and is expected to continue for the rest of the year and 2022.

Uncertainty remains in relation to the pandemic and slack conditions are expected, with marked differences between sectors.

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Original note