IMF says inflationary pressures in Mexico pose difficult balancing act

Mexico's annual inflation rate likely reached the highest level in almost four years in October

IMF Mexico
The International Monetary Fund (IMF) logo is seen outside the headquarters building in Washington, U.S., September 4, 2018. Photo: REUTERS/Yuri Gripas/File Photo

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.

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