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In
its recently published monetary report, the Bank reiterated the 3%-target
but notes that inflationary expectations are not converging with its
ambitious target. In fact, this month’s Consensus sees year-end
inflation in 2003 higher. Moreover, inflation risks are mainly on
the upside, including:
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Labour costs. Wages have been on the upside in some sectors of the
economy, which may be exacerbated by an increasing shortage of qualified
labour and wage negotiations that are out-of-line with the actual
development of inflation and productivity increases.
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Pent-up price increases on the producer side. According to the
Central Bank, the national producer price index ex-oil and services has
picked up in the second quarter, which may feed into higher consumer
prices.
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External risks. On the external side, the Bank sees risks in a rapid
deceleration of US economic growth, a substantial increase in
international interest rates, a sudden plunge in US stock prices, and a
significant drop in oil prices.
While
the Central Bank emphasised its commitment to a tight monetary policy, it
clearly recognizes the limitations of its monetary policy tools and calls
upon the government to cut back on spending in order to achieve inflation
targets. So far, the Central Bank’s calls have been rejected by
the government, which argues that the fiscal surplus achieved in the first
half this year precludes any necessity for adjustment.
Rising
trade deficit. According to preliminary
data, the trade deficit reached US$ 734 million in August, the highest
monthly deficit this year and considerably above market expectations.
Exports continued to grow at a fast rate (+24.5% over August 1999) but
imports increased even more rapidly, expanding 26.0% over the same month
last year, propelled by strong domestic for consumer good imports.
The annual trade deficit now stands at US$ 6.7 billion. While this
is well above the trade deficit of US$ 5.4 billion in 1999, the trade
deficit as a percentage of GDP should decline this year to below the 1.0%
ratio in 1999, owing to the strong GDP expansion in 2000.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Mexico and includes information available up to 10 September
2000. For more details please click here.
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