Economics: Banxico cut of reference rate can be considered premature

MEXICO - Report 20 Aug 2024 by Mauricio González and Francisco González

As mentioned in last week's edition of the Economic Outlook, the Banco de México's Board of Governors decided at its August 8 meeting to lower the reference rate from 11% to 10.75%, with three votes in favor and two against. This occurred in the context of the recent publication of the July 2024 consumer inflation figures, which rebounded again to an annual 5.57% (+59 basis points vs. June), due to a strong increase in non-core inflation (+269 bps vs. June).

This interest rate decision by Banxico can be considered hasty. It does not take into account that Mexico’s country risk has risen following the June elections due to the constitutional reforms proposed by the current administration or that it is possible that financial volatility will deepen during the discussions of the 2025 Federal Budget and the (lack of) solution to the Pemex problem, as well as the US presidential elections and their repercussions on Mexico.

Banxico's message in lowering the rate is one of excessive confidence that it will achieve its goals, rather than the caution demanded by the current situation.
In this week’s Outlook, we analyze Banco de México's decision and the recent behavior of inflation.

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