Mexico's inflation exceeds target, casting doubt on next central bank moves

By Aida Pelaez-Fernandez and Ricardo Figueroa

MEXICO CITY (Reuters) -Mexico's annual inflation rate accelerated in May and exceeded the upper-end of the central bank's target range, official data showed on Monday, creating an uncertain landscape for borrowing costs in Latin America's second-largest economy.

Consumer prices in Mexico rose 4.42% in the year through May, according to national statistics agency INEGI, above the 4.38% expected by economists in a Reuters poll and up from 3.93% the previous month.

Mexico's central bank, also known as Banxico, has an inflation target of 3% plus or minus one percentage point, and analysts now diverge on what its next monetary policy moves will be.

Banxico last month cut its benchmark interest rate by 50 basis points for the third consecutive time to 8.5%, the lowest level since 2022.

Its next monetary policy decision is scheduled for June 26, and the bank had said it expected the inflation environment would allow it to continue its easing cycle.

"The Bank of Mexico should pause the cycle of interest rate cuts, given the inflation rebound," Banco Base's economic analysis director Gabriela Siller said.

Capital Economics economists, meanwhile, wrote in a note to clients that the inflation rate rise "was mainly driven by stronger non-core prices and so is unlikely to trouble officials at the central bank".

Goldman Sachs analysts said that while a 50-basis-point cut may still be in play in June, the committee would likely have to slow its easing pace to 25 basis points in August "if we do not see more favorable inflation prints in the coming months."

In May alone, headline consumer prices were up 0.28%, according to INEGI, while the closely watched core index, which strips out some volatile food and energy prices, rose 0.30%. Both came in slightly above market forecasts.

(Reporting by Aida Pelaez-Fernandez and Ricardo Figueroa; Additional reporting by Noe Torres; Editing by Gabriel Araujo and Sharon Singleton)

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