Background on Banxico and Its Role
The Bank of Mexico (Banxico) is the central banking institution responsible for managing monetary policy in Mexico. Its primary objectives are to maintain price stability and support the government’s economic goals. Banxico uses various policy tools, including setting the target rate, to influence inflation and ensure sustainable economic growth.
FMI’s Recommendation for Banxico
According to experts from the International Monetary Fund (FMI), Banxico should consider pausing its rate-cutting cycle. This approach aims to help anchor inflation expectations and accelerate the return to the 3% inflation target.
Economic Context and Inflation Trends
Mexico’s economy has been experiencing lower activity, which should help alleviate price pressures, particularly in the services sector. Additionally, the recent appreciation of the Mexican peso is expected to contribute to reducing underlying inflation for goods.
FMI’s Inflation Projections
The FMI anticipates that aggregate demand will continue to slow down, along with the recent strengthening of the Mexican peso. These factors should support lower inflation in the coming months.
Current Monetary Policy Stance
Banxico’s target rate remains in a restrictive zone at 7.50%, following 11 rate cuts of 375 basis points since March 2024.
FMI’s Proposed Rate Adjustment
The FMI projects that Banxico will pause the rate-cutting cycle and resume it in the second half of the following year. Experts expect a new round of reductions accumulating 150 basis points, bringing the target rate down to 6%.
Impact of Lower Economic Activity and Peso Appreciation
According to FMI experts, lower economic activity will help ease price pressures, especially in the services sector. Meanwhile, the recent appreciation of the Mexican peso should contribute to reducing underlying inflation for goods.
- Lower Economic Activity: As the Mexican economy slows down, it will help alleviate price pressures, particularly in service-oriented sectors.
- Peso Appreciation: The strengthening of the Mexican peso against other currencies should contribute to reducing underlying inflation for goods.
- Food Prices: Food price contributions to disinflation are expected as the effects of drought subside.
