Headline Mexican inflation has now peaked and will drop back within Banxico’s 2-4% target range as the earlier spike in fuel inflation unwinds. In contrast, we expect that core inflation will continue to hover at, or just above, this range in the coming quarters. Even so, with the central bank’s reaction function clearly shifting towards tolerating higher inflation, we think that the policy rate will stay at 4.00% for longer than most anticipate.
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