Introduction
September, known for its back-to-school season, typically doesn’t see low inflation rates. However, the price marks left during the first half of this month should prompt reflection from Banco de México (Banxico).
Economic Context and Inflation Data
If a subsecretary of monetary policy were to receive the report, it would likely highlight the negative data from July’s Global Indicator of Economic Activity, which contracted by -1.2% annually.
The report would underscore the industrial activity’s contraction of -2.8% and instruct a reduction in the reference interest rate by at least a quarter point.
However, as an autonomous institution, Banxico’s primary mandate is to control inflation. Consequently, there are few doubts that a pause in the reference rate reduction might be the best course of action.
If Banxico’s communication skills were stronger, the Junta de Gobierno could communicate a predicted rate decrease while emphasizing prudence and attention to the factors showing inflationary pressures remain far from being defeated.
However, if the majority acting in line with fiscal policy insists that general inflation remains within the tolerable range of 3±1 percentage points, they will continue to avoid addressing market concerns and tread on familiar ground of other data.
The underlying inflation, unaffected by fluctuations in potato and avocado prices or chicken price increases, rose by 0.22% during the first half of this month, placing it at 4.26% annually. This marks two consecutive quarters with increases outside the target range.
While service inflation shows some economic deceleration, the core inflation within the central prices indicates the highest level since 2022 for goods.
There is an evident economic weakness, and a presidential obsession to avoid negative data and influence the Gross Domestic Product (GDP) expansion to mark at least 1% this year, but this is not Banxico’s responsibility.
Currently, with the reference interbank interest rate at 7.75%, Banxico’s margins for calculating the reduction pace have narrowed. This doesn’t imply the ideal rate, but rather a need for gradual interest rate reduction.
The wide margin Banxico had to rapidly decrease the interest rate with relatively minor market impact is nearing its end as the differential with the US rate shrinks, and the current rate is perceived within a neutrality range.
Key Questions and Answers
- Q: Should Banxico pause its interest rate reduction? A: Given the narrowing margins and the need for gradual interest rate reduction, a pause might be prudent.
- Q: What factors should Banxico consider? A: Factors include the contracting economic activity, underlying inflation outside the target range, and the shrinking differential with US interest rates.
- Q: How might Banxico communicate its decision? A: If communication skills were stronger, Banxico could signal a predicted rate decrease while emphasizing prudence and attention to inflationary pressures.
- Q: What are the implications of ignoring market concerns? A: Ignoring market concerns may lead Banxico to tread on familiar ground of other data, potentially overlooking critical economic signals.
