Bank of Mexico Confident About Meeting Inflation Target

A one-time government increase in Mexican gasoline prices in January of next year could delay the expected slowdown in inflation, but the central bank says a new government policy on energy prices will help in the long run to meet its 3% inflation target.

The Mexican government sets gasoline prices, and in recent years has been raising them by a small amount each month to reduce the level of government subsidy. Starting next year, the price will be raised in line with expected inflation. And in coming years Mexico will move toward allowing markets to set the prices under recent changes in the country’s energy laws that will open the business to the private sector. Currently, state oil company Petróleos Mexicanos is the only producer and importer of gasoline.

In July, the Bank of Mexico forecast that the annual inflation rate measured by the consumer price index would slow toward its 3% target in January of 2015, largely because the consumer tax increases that pushed prices up this year would fall off the 12-month radar screen.

The CPI was up 4.2% in the 12 months through September, above the central bank’s 2%-4% comfort zone for a third consecutive month. Higher inflation and a pickup in economic growth are expected to keep the central bank from moving interest rates in the near term.

In September, the central bank said it expected the target to be approached in the first half of 2015. The new timing came as Finance Minister Luis Videgaray said next year’s gasoline price increase of 3% will be a one-time event at the start of the year, replacing the current monthly hikes.

Deutsche Bank said in a recent report that the front-loading of the gasoline price hike, and talk of raising Mexico’s minimum wage, could push up inflation expectations early next year.
Bank of Mexico Gov. Agustín Carstens told reporters Tuesday the new gasoline price policy will help to meet the inflation target, since the planned increase is well below the accumulated increase of about 10% this year.

“Really, the cause of waiting a bit longer for inflation to converge toward the target is shocks in a number of prices, above all meat and some other agricultural prices that have been persistent,” he said. “But we’re confident that the convergence will come about by mid-year.”

And that doesn’t mean inflation won’t slow in January as the effect of the new taxes wanes, he added.

Although a major oil producer and exporter, Mexico imports more than 40% of its gasoline use of about 770,000 barrels a day.

On the subject of oil, and the recent drop in crude prices that could affect federal government revenue, Mr. Carstens appeared confident that Mexico has enough experience with oil-price swings and measures to counter it—such as stabilization funds and an oil-price hedging program—to mitigate the impact.

Mexican export crude was just over $80 a barrel on Monday, below the $82 price estimate in the 2015 budget proposal currently before Congress.