Mexico’s Inflation and Economic Growth Update

By Gabriel Araujo

(Reuters) – Mexico’s statistics agency INEGI released data indicating that inflation eased more than anticipated, while economic growth remained modest, suggesting a possible interest rate cut from the central bank next month.

The Bank of Mexico (Banxico) recently reduced its benchmark interest rate from 11% to 10.75% in a split decision in early August, despite raising its year-end inflation forecasts, reaffirming that further adjustments are possible.

A new rate cut on September 26 is increasingly likely after INEGI announced that annual inflation in mid-August was 5.16%, down from 5.61% the previous month and below the 5.31% forecast by economists. This rate is still above the central bank’s target of 3% inflation.

The core consumer price index, which excludes volatile food and energy prices, also showed a decline, with the annual rate falling below 4% for the first time since early 2021.

Natalia Gurushina, chief economist at VanEck, commented, “Was Mexico’s August rate cut justified? Below-consensus bi-weekly headline and core CPI say yes. However, continued disinflation and substantial fiscal consolidation are key to prevent perceptions of overshooting.”

Despite the rate cut, two members of Banxico’s board opposed the decision, arguing it could harm the bank’s credibility as it raised its year-end inflation forecast to 4.4% from 4.0%. However, if the downward trend in consumer prices persists, analysts at CIBanco suggested a higher likelihood of a rate cut at the next meeting.

Tepid Growth

The weak economic performance could sway the board’s more dovish members. INEGI data revealed that Mexico’s gross domestic product (GDP) increased by 0.2% in the second quarter, aligning with expectations but indicative of a slowdown since late last year.

Yearly growth for the April-June quarter was reported at 2.1%, slightly below the anticipated 2.2%. Banorte economists noted that the Mexican economy faces significant challenges in the latter half of this year, noting potential bright spots but acknowledging downside risks to the projected 1.9% annual GDP growth.

Additionally, INEGI reported that economic activity in June was flat compared to the previous month and declined 0.6% year-on-year, both of which fell short of expectations.

Kimberley Sperrfechter, an economist with Capital Economics, mentioned, “The August mid-month CPI print, coupled with the weak activity data for June and the Fed’s announcement of an impending loosening cycle, leads us to expect Banxico to lower its policy rate by another 25 basis points in September.”