Mexico Central Bank Says Ukraine Crisis Could Spur New Inflation

Mexico's central bank on Wednesday said pandemic shocks on inflation have been deeper and longer lasting than expected, and the bank could not rule out new price pressures caused by Russia's invasion of Ukraine.

In a quarterly report, the Bank of Mexico, known as Banxico, said the Russia-Ukraine crisis could lead to higher commodity prices, especially for energy and agricultural products. Supply chain interruptions and higher wage costs could also lead to inflationary pressures, it said, while stressing that it is focused on monetary policy aimed at price stability.

Banxico governor Victoria Rodriguez cautioned in a news conference that it was too early to tell how the Russia-Ukraine crisis would affect prices and inflation, but said the conflict would be one of many factors taken into consideration in monetary policy decisions.

"We will be very attentive to how the conflict evolves. ... It will depend on the length and scope it might have," Rodriguez said. "It could impact the development of both energy and grains prices."

The central bank said it expects that inflationary pressures would diminish throughout 2022 and that annual headline inflation would average 4% in the fourth quarter and decline to near the bank's 3% target by the second quarter of 2023.

It also forecast that GDP would grow between 1.6% and 3.2% this year.

Rodriguez also noted that decisions by the U.S. Federal Reserve are one of the "relevant variables" that Banxico takes into account in its own monetary policy decisions.

Fed Chair Jerome Powell, balancing high U.S. inflation against the complex new risks of a European land war, said earlier on Wednesday the central bank would begin "carefully" raising interest rates at its upcoming March meeting but would be ready to move more aggressively if inflation does not cool as quickly as expected.