Mexican central bank to stay on sidelines with inflation low

Low inflation in Mexico will keep the country's central bank on the sidelines, some analysts said.

Consumer price inflation in the North American country dropped by 0.3% month-on-month in April, as expected by markets, but the year-on-year rate of price increases dipped from 2.6% to 2.5%, one tenth of a percentage point less than expected.

Falls in non-core energy prices and fresh food weighed on the headline index, Andres Abadia, Senior International Economist at Pantheon Macroeconomics said in a research note sent to clients.

Energy prices were dragged lower as a result of the introduction of new electricity tariffs while fresh food prices declined by 1.4% in comparison to the month before on the heels of a 1.0% drop in March.

"Overall, these data confirm that inflation pressures in Mexico are weak, and we think that CPI inflation likely will hover around its 3% target during the second half of the year," Abadia said.

The analyst also pointed out the recent appreciation in the peso, in line with other EM currencies, which he said had helped to quell fears of a prolonged pass-through effect in the wake of the sell-off seen in the year before.

Moreover, domestic-demand inflation pressures remain subdued helping to keep inflation subdued. Under these circumstances, we think that Banxico will focus mainly on growth and the MXN, leaving rates on hold over the coming meetings.