Bank of Mexico sees temporary inflation hit from new tariffs, taxes

By Sarah Morland and Raul Cortes

MEXICO CITY, Feb 19 (Reuters) - Most of the members of the Bank of Mexico's governing board said their higher inflation forecasts factored in the anticipated impact of taxes on sugary beverages and tariffs on imports from China, according to the minutes from the central bank's February 5 meeting.

Most of the officials, however, expressed optimism the inflationary effects of the new taxes and tariffs would be temporary and short-term, the minutes showed on Thursday.

The central bank unanimously held its benchmark interest rate at 7% two weeks ago, its first pause since mid-2024, following an uptick in inflation and economic growth.

However, Banxico, as the central bank is known, projected inflation would only hit its 3% target in the second quarter of 2027. It had previously expected to reach the target in the third quarter of 2026.

Banxico also highlighted that prices for services - such as rent and restaurants - are not falling as quickly as anticipated, the minutes said. The sticky services inflation played a role in the updated inflation forecast and decision to pause rate cuts.

New taxes on products such as cigarettes and sugary drinks that came into effect in January should impact just 2.1% of household spending, Banxico said, with most board members predicting inflationary effects to normalize after a year.

Mexico last month also rolled out new tariffs on China and other mainly Asian countries that do not have free trade agreements with the Latin American country. China is Mexico's second-largest supplier after the U.S. market.

The duties will apply to thousands of products, including automobiles, auto parts, textiles, clothing, plastics and steel. Chinese cars, which now make up roughly 10% of Mexico's market share, will face 50% tariffs.

A majority of Banxico board members warned of uncertainty regarding the impact of the tariffs on prices, but said they believed that, as with the taxes, the effect should be "temporary and limited."

Separately, a majority of board members also noted signs of a cooling job market, and some said that ongoing trade tensions and uncertainty could weigh on economic growth.

Bank of Mexico Deputy Governor Jonathan Heath, who has sharply criticized some of his colleagues' inflationary forecasts, found fault with the latest analysis. He said the effects of the fiscal adjustments could involve "significant lags" and the central bank's rationale omits "worsening inflationary dynamics."

"Inflation is, thus, more likely to be underestimated than overestimated," he said.