Banxico minutes: Global uncertainty, inflation risks dominate

The majority of Board members noted that the global economic environment continues to be characterized by high uncertainty, mainly due to the persistence and potential escalation of geopolitical conflicts, particularly in the Middle East.

This conflict has negatively impacted global growth prospects for 2026, with international organizations reducing their global growth expectations from 3.3 percent to 3.1 percent in a short-duration scenario, and to 2.5 percent in a more adverse scenario.

Some members highlighted that the impact of the Middle East conflict on the global economy remains uncertain, depending on its duration, intensity, and each economy's exposure to energy supply from the region.

While negotiations between the United States and Iran and a recent ceasefire partially moderated uncertainty, doubts about the agreement's stability persist.

Energy shocks typically depress activity by moderating aggregate demand and reducing household spending, leading to lower disposable income, precautionary savings, and deferred purchases of durable and energy-intensive goods.

These narratives have been used to explain downward revisions in US growth prospects.

Furthermore, the effects of the conflict on activity and inflation are compounded by uncertainty related to changes in US trade policy, which in 2025 led to lower aggregate demand and reduced global growth prospects.

Global economic activity in the first quarter of 2026 expanded at a faster pace than the previous quarter, with advanced economies rebounding, while emerging economies (excluding China) moderated.

Purchasing Managers' Indices in advanced economies suggest continued expansion in manufacturing but deceleration in services.

US activity expanded, supported by non-residential investment and consumption, despite being below expectations.

The Euro area, however, saw economic activity expand at a slower pace, prolonging its deceleration.

Labor markets in some advanced economies showed signs of cooling, with stable unemployment rates in the US despite lower labor participation and moderating demand.

International oil prices increased due to the geopolitical conflict in the Middle East, causing significant supply disruption from damage to energy infrastructure and shipping interruptions in the Strait of Hormuz.

While strategic reserves and pipeline diversions cushioned the impact, initial supply reductions were estimated at around 10 million barrels per day, or 10 percent of global supply.

Prices remain near $100 per barrel, with options pointing to upside risks.

Futures curves indicate a decline from June, but a return to pre-conflict levels could take over a year.

Spot prices rose 60-70 percent since February, though below levels seen in other disruptions.

Unlike the Ukraine war in 2022, this conflict began amid an oil supply surplus.

Elevated prices also stem from reduced inventories and infrastructure damage.

International organizations anticipate a normalization of the energy market by early Q4, with an average price of $86 per barrel for 2026, but a more adverse scenario could see prices at $100 and $75 per barrel in 2026 and 2027, respectively.

Global headline inflation recently rebounded, mainly due to rising energy prices, exceeding targets in many advanced and emerging economies in March.

Medium and long-term inflation expectations remained anchored, but core inflation showed persistence.

The contagion to non-energy items has been limited, depending on each economy's exposure and government policies.

In the US, PCE inflation rose from 2.9 percent to 3.5 percent between January and March, driven by energy prices, while core inflation increased slightly.

Euro area headline inflation rose from 1.9 percent in February to 3 percent in April, reflecting higher energy and food prices, partially offset by reduced core inflation.

Upside risks persist from elevated energy prices.

International organizations revised inflation forecasts upward, anticipating increases to 4.4 percent in a short-duration conflict scenario and 5.4 percent in a more adverse one.

Most advanced and emerging economies expect a temporary deviation of headline inflation from its convergence path, with major advanced economies anticipating convergence to target by 2027, and the US by 2028.

Monetary authorities have adopted a cautious tone, with many central banks holding policy rates unchanged.

The Federal Reserve maintained the federal funds rate in April, acknowledging elevated inflation due to global energy prices and noting labor market weakness, with some dissension on the accommodative bias.

International financial markets showed volatility since the previous decision, with a partial moderation of uncertainty and increased risk appetite following negotiations and ceasefire announcements.

The US dollar depreciated against some currencies, while commodity-exporting currencies appreciated.

Government bond yields in the US and major advanced economies showed limited movements, and US stock indices reached historical highs.