The International Monetary Fund (IMF) on Friday said Mexico‘s recent inflationary pressures, while mostly temporary, pose a difficult balancing act amid still sizable slack in its economy.
“A credible medium-term tax reform, to be implemented as the economy strengthens, would help finance needed social and public investment spending and put the public debt to GDP ratio on a firm downward trajectory,” the IMF said in a statement.
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Mexico‘s annual inflation rate likely reached the highest level in almost four years in October while core inflation has reached its highest point since 2009, a Reuters poll showed on Friday.
In the context of the 2021 Article IV consultation with Mexico, the IMF’s directors recommended a gradual, data-driven pace of policy normalization that carefully balances support for the recovery while keeping medium-term inflation expectations well anchored.
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Mexico‘s economy shrank 0.2% in the July-September period versus the previous quarter after a resurgence in the coronavirus pandemic dragged down service sector activity and disrupted global supply chains.
The contraction, Mexico‘s first since a recovery began from the pandemic, poses a challenge to the central bank’s monetary policy tightening cycle, but stubbornly high inflation appears likely to take precedence.
Annual headline inflation currently stands at 6.1%, double the Bank of Mexico‘s 3% target rate.