Inflation Ticks Up Again

At 4.11% y-o-y, headline inflation remained on the high side in February, coming in some way above Banxico 's upper target band of 4.0%. Likewise, the core rate crept upwards to 3.95% (compared to just 2.89% in February last year). These price pressures have heightened speculation that Banxico will now have to raise interest rates to dampen future expectations. The break-even rate of inflation - the differential between the 10-year fixed rate and inflation-linked bonds - has paused at 4.00%, ending a run that has seen it fall by around 20 basis points since the end of February. Given the relative uncertainty over inflation and monetary policy, we could now see the break-even rate remain around the 4% mark, or perhaps even head back upwards. We still believe that Banxico will look to the US Federal Reserve to make a monetary move first, before acting accordingly.

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