Mexican cenbank expects slower growth, higher inflation

Mexico's central bank narrowed its 2018 GDP growth forecast with a downward bias to between 2-2.6% from the 2-3% in its latest quarterly inflation report.

The monetary authority also lowered its GDP forecast for 2019 to between 1.8% and 2.8% from the 2.2-2.3% range given May 30.

In a presentation Wednesday, central bank governor Alejandro Díaz de León (pictured), said the lower forecast for this year is the result of the unexpected 0.2% quarter-on-quarter contraction that occurred in 2Q18, hinging on multiple factors including growing concerns surrounding US trade policies and depreciation of the peso.

Inflation

The central bank increased its general inflation forecast for year-end 2018 to 4.2% from 3.8% in May, and its 2019 inflation estimate to 3.3% from 3.1%, citing resurgent gasoline and LP gas prices as a driving factor.

Annual inflation rose in Mexico for a second straight month in July to 4.81%.

In the question and answer session, Diáz de León discussed major issues, including the recently announced US-Mexico trade agreement, the incoming government's agenda and US monetary policy.

The governor said the achievement of the US-Mexico trade deal "clearly reflects an important step...a very important step to have this understanding on this trade pact," adding it would take time before all the final details of the agreement are signed.

The central banker added, "This would mean that there would be a considerable reduction in uncertainty and this could reactivate investment and growth...but all of this would depend on these [details] becoming finalized."

Díaz de León stressed that the growth and inflation outlook does not take into account any impact from president-elect Andrés Manuel López Obrador's (AMLO) social programs, noting the bank would watch carefully after AMLO takes office on Dec. 1 for the presentation of the 2019 budget proposal.

The budget proposal will give "a very clear, very concrete vision" of what will be the next administration's actions on the public policy front, he noted.

Regarding the US Federal Reserve, which the central bank included as one of its primary considerations in upcoming monetary policy meetings, the governor said the bank's forecasts are dependent on the current outlook, but that this could change if US inflation increases unexpectedly.

"In the event that [US] inflation occurs beyond what we today expect, that could bring greater volatility to the markets," said Díaz de León.