Introduction
In my previous collaboration (available here), I warned about the risks of the Bank of Mexico deciding to reduce its reference interest rate—from 8.5% to 8.0%—in a context where inflation was not only stagnant but showing signs of an upswing. With the latest data, it’s clear that this concern was not only valid but inevitable.
Inflation and Economic Growth Expectations
The Bank of Mexico’s Enquiry on Private Sector Economists’ Inflation Expectations reveals that the general inflation expectation for the end of 2025 rose to 4.21%, while the underlying inflation reached 4.10%. For 2026, expectations remain above the target at 3.90%. This indicates that inflation is not under control, and the market is well aware.
Moreover, the economic growth estimation was cut from 2.0% to 1.8% for this year and from 2.0% to 1.9% for the following year. At this pace, the economy fails to maintain even minimal growth required to sustain population growth, let alone generate sufficient formal jobs.
Deterioration in Employment
The deterioration in employment is evident, as per IMSS data: by the end of March, 226,731 new jobs were created in the year. By June, the total dropped to 87,287—a loss of 139,444 jobs in just three months. If we consider that the country needs to create at least 100,000 jobs monthly, by June we should have created 600,000. We’re not even at 15% of that target.
Banco de México’s Interest Rate Cut and Its Implications
While employment plummets, inflation rises, and economic activity stalls, the central bank reduces interest rates. Officially, to stimulate consumption. However, in practice, it seems more like a relief for public finances. The government has increased its internal debt, and with a lower rate, the cost of this debt decreases. But this fiscal relief comes at a price: it’s paid by the population through reduced purchasing power and limited real improvement options.
Subgobernador Jonathan Heath’s Recent Interview
Jonathan Heath, subgobernador of the Banco de México, recently stated in an interview that he voted to keep the rate unchanged and was firm: “Inflation is not going down.” He pointed out that there are no clear signs of disinflation and maintaining cuts would be premature. In his assessment, service prices—especially food—continue to rise, and goods, which previously helped contain inflation, no longer do. In fact, service inflation is around 4.61%, showing structural resistance.
He also warned that insecurity and lack of competition in key sectors continue to elevate costs, making it harder to lower prices. He added that expectations are no longer anchored to the 3% target, and the gap between forecasts and reality is eroding the central bank’s credibility.
He went further, stating that Mexico might be entering a mild recession or economic stall, which typically helps reduce inflation but does not justify further rate cuts without clear evidence that prices will fall. In other words, not only did they cut the rate at the worst possible time, but they might have weakened future maneuvering room.
Public Debt and Government Spending
The Secretariat of Finance celebrated a 0.1% real reduction in public debt during May, a nearly symbolic move highlighting the urgency to correct accumulated over-indebtedness—especially in 2024. This was acknowledged by the president herself during her morning press conference.
She admitted that corruption still exists in public spending, contrary to the assumption since 2018. She stated, “We will fight areas where corruption still exists.” She also justified new reforms to the Public Works Law and Acquisitions Law to “make public spending much more efficient,” implying that the previous administration’s spending was inefficient, disordered, and often haphazard.
Market Anticipation of Rate Increase
Meanwhile, the Bank of Mexico’s own survey reveals that the market anticipates the rate will have to rise again. The expectation for the end of 2025 is 9.50%, far above the current level. The cut was anticipated, poorly justified, and likely to be reversed.
Key Questions and Answers
- Who benefits from these decisions? The government gains time.
- Who loses? Families face higher prices, scarcer jobs, and an increasingly uncertain economic environment.
*The author is an academic at the School of Government and Economics and the School of Communication at the Universidad Panamericana, an expert consultant on economic, financial, and governance topics, the General Director and Founder of El Comentario del Día website, and the host of the analysis program Voces Universitarias.
Contact and social media: https://eduardolopezchavez.mx/redes
