Mexico to hike daily minimum wage by 20%, experts worry about inflation

The Mexican government on Monday agreed to raise the daily minimum wage by 20%, the second consecutive major increase, but experts said a large hike could make it challenging for the central bank to keep core inflation under control.

"We continue to gradually recover the value that the minimum salary has lost over time without creating instability, without creating inflation," Mexican President Andres Manuel Lopez Obrador said. "This is an important increase."

The daily minimum wage will be 123.22 pesos ($6.36) in 2020; in the northern border region, where it was raised by 5%, it will be 185.56 pesos. Nearly 11 million Mexican workers earn the equivalent of a minimum wage.

Lopez Obrador, a leftist who took office in December 2018, has vowed to close the wage gap in a country where almost half of the population lives in poverty.

Mexico increased the minimum wage by 16% this year, during which inflation eased to 2.97% in November, just below the central bank's target of 3%. But, core inflation, which strips out some volatile elements, was higher last month at 3.65%.

"In the past, real wage growth had been generally aligned with productivity," economists at JPMorgan wrote in a note issued ahead of the decision. "The new wage policy has opened a significant wedge between the two, which eventually will likely create economic imbalances."

The central bank, known as Banxico, did not immediately respond to a request for comment. In its most recent minutes, some Banxico members raised uncertainty around changes to the minimum wage.

However, experts said a significant change to the minimum wage could put the breaks on the central bank's trend of cutting interest rates, which were cut from 8.25% at the end of last year to 7.50%.

Banxico will likely cut interest rates again on Thursday, to 7.25%, according to a Reuters poll of 16 analysts. At the end of 2020, the rate could be at 6.50%.

Experts also said that a significant increase of the minimum wage would put pressure on salaries in the formal economy, a dynamic called a "lighthouse effect" that is difficult to calculate but usually drives up inflation.

"There's no consensus on what effects this will have on other wages or how it will affect core inflation," said Benito Berber, chief economist for Latin America at Natixis.