Bank of Mexico Lowers Interest Rate, But Inflation Concerns Remain
Yesterday, the Bank of Mexico (Banxico) lowered its reference interest rate from 11% to 10.75%, sparking concerns among specialists. With inflation still a major issue, there is speculation of further rate cuts in the coming months. However, this action raises the risk of undermining the central bank’s credibility if inflation expectations are dislodged.
In its monetary policy announcement, Banxico acknowledged that annual general inflation rose to 5.57% in July due to a surge in the non-core, more volatile component. However, the underlying component, which better reflects the underlying inflationary trend, showed 18 consecutive months of decreases in July 2024, landing at 4.05%.
Despite this, the bank revised its inflation forecast for the end of 2024 upwards to 4.4%, citing the persistent influence of the non-core component and expectations of its future impact on general inflation.
Financial institutions like Valmex Casa de Bolsa predict that inflation will remain elevated in the remainder of 2024 and early 2025 due to ongoing pressure on the non-core component.
Some analysts express concern that the reduction in interest rates could be risky given the high budget deficit in Mexico. This deficit has historically been a catalyst for inflation in the country.
Furthermore, the unpredictability of the Mexican fiscal and political environment contributes to a high risk premium on Mexican assets. Unfavorable market reforms proposed by the Morena ruling coalition are also expected to be approved in September, adding to market uncertainty.