Background on Banxico and its Role
Banquiers de Mexico, or Banxico, is the country’s central bank and is responsible for formulating and implementing monetary policy. Its primary objective is to maintain price stability, which it defines as an inflation rate of 3% plus or minus one percentage point.
Current Inflation Data and Expectations
Recent inflation data indicates ongoing pressures, particularly in the underlying (core) inflation component. The National Consumer Price Index (INPC) reported a quarter-on-quarter variation of 0.10%, which was lower than expectations from INVEX and the Citi survey (0.12% q/q).
However, the underlying INPC saw a 0.22% q/q change, surpassing both INVEX’s estimate of 0.18% and the Citi survey’s 0.17%. The overall inflation rate dropped to 4.51% a/a, mainly due to declines in agricultural, energy, and government-authorized tariff components. Still, the underlying inflation reached its highest level since May 2024 at 4.20% a/a, driven by a surge in the services category.
Banxico’s Previous Communication
In its last three communications, Banxico explicitly stated that the upcoming rate cut would be similar in magnitude (50 basis points). This approach, however, may no longer be suitable given the recent inflation trends.
Banxico’s New Communication Strategy
Given the narrowing gap between overall and underlying inflation, with the latter now exceeding the upper limit of Banxico’s tolerance range, the central bank must express concern over this trend and assess whether the increase is temporary.
Banxico’s previous justification for reducing rates, despite high overall inflation, was based on a low underlying inflation rate. Now, with the situation reversed, Banxico should reconsider its stance.
Economic Context and Arguments
Banxico has also cited economic weakness as a reason for its monetary policy decisions. However, this argument seems to have limited influence on the recent inflation uptick amidst a favorable economic context.
If the components of underlying inflation, especially prices for goods and services, maintain average levels similar to those observed in the second quarter, annual inflation could approach 4.4%. This level should be deemed unacceptable by Banxico’s decision-making body.
Key Questions and Answers
- What is Banxico’s primary objective? Maintaining price stability, defined as an inflation rate of 3% plus or minus one percentage point.
- What recent inflation data indicates ongoing pressures? The underlying (core) inflation component, with a 0.22% q/q change in the INPC.
- Why should Banxico reconsider its stance on inflation? The gap between overall and underlying inflation has narrowed, with the latter now exceeding the upper limit of Banxico’s tolerance range.
- What arguments has Banxico used in its recent decisions? Economic weakness and low underlying inflation rates.
- What could be an unacceptable annual inflation rate for Banxico? Approaching 4.4%, based on recent trends in underlying inflation components.
*Rodolfo Campuzano Meza is the General Director of INVEX, an operator of investment funds.
