Banxico anticipates inflation due to the conflict in the Middle East

The conflict in the Middle East could drive up fuel costs, increasing transportation and production costs worldwide, posing a significant risk of inflation, according to members of the Governing Board of the Bank of Mexico (Banxico).

In accordance with the decisions made at the latest monetary policy meeting, the members noted that, in the absence of a definitive ceasefire agreement and given the ongoing restrictions in the Strait of Hormuz, risks to oil prices and their derivatives remain.

Some members of the Governing Board have noted that if the conflict drags on, the mechanisms that have so far mitigated the impact—such as crude oil prices, the use of strategic reserves, and inventory levels—will face increasing pressure. Added to this is concern over the cost of refined fuels, as a price increase could lead  to production and transportation costs in various countries.

Supply chains for products such as plastic could also be affected, which would put additional pressure on inflation. The central bank has noted that increased oil production in other regions and lower demand would help ease some of the pressure on energy prices.

Earlier this month, the central bank determined that the 6.50% interest rate remains at an appropriate level to bring inflation down in the coming months.

 This decision by the Governing Board has been deemed appropriate for maintaining the benchmark rate at its current level. Analysts note that keeping the rate unchanged may be a move the market had anticipated and reinforces the expectation that Banxico will maintain a cautious stance regarding further changes to the cost of borrowing.

For its part, Banxico has indicated that it will remain cautious in its upcoming decisions, given this risk of rising prices.