Investment Manager's Insight: Mexico's Inflation Slows, Opening Door for Interest Rate Cut
By Gabriel Araujo
Recent data released by Mexico's statistics agency INEGI indicates that inflation has slowed more than expected while economic growth remains lackluster. This development has raised the possibility of the country's central bank, Banxico, implementing a new interest rate cut in the near future.
Following a previous rate cut in August, Banxico lowered its benchmark interest rate to 10.75% from 11%. The central bank has hinted at further policy adjustments, with another rate cut expected when policymakers convene on Sept. 26. This move is reinforced by INEGI's report of lower-than-expected inflation figures for mid-August.
In the first half of August, Mexico's 12-month headline inflation stood at 5.16%, down from the previous month's 5.61%. Despite this decline, inflation remains above the bank's target of 3%, signaling the need for further action.
The core consumer price index, which excludes volatile energy and food prices, also showed a decrease, falling below 4% for the first time in months. This trend supports the argument for a rate cut to stimulate economic activity.
Analysts are divided on the necessity of a rate cut, with some voicing concerns about undermining the central bank's credibility. However, if consumer prices continue to moderate and economic growth remains subdued, the likelihood of a rate cut in September increases.
On the economic front, Mexico's GDP expanded by 0.2% in the second quarter, in line with expectations. Annual growth sat at 2.1%, slightly below estimates, indicating a slowdown trend that has persisted since late last year.
Despite challenges facing the Mexican economy in the second half of the year, there are some optimistic projections. However, downside risks remain, with potential for a lower-than-expected GDP growth rate.
Given the current economic conditions, coupled with the Federal Reserve's plan to initiate a loosening cycle, experts anticipate Banxico to lower its policy rate by 25 basis points in September to spur growth.
Analysis: The recent data from Mexico's statistics agency and the central bank's actions point towards a possible interest rate cut to combat slowing inflation and tepid economic growth. This move could have implications for investors and consumers, potentially leading to lower borrowing costs and increased economic activity. It is essential for individuals to stay informed about these developments to make informed decisions regarding their finances and investments.