Banxico Highlights External and Internal Challenges to Mexico’s Economic Stability
In its most recent quarterly report, the Bank of Mexico (Banxico) acknowledged that several structural factors—including insecurity, high transportation costs, and low competition across various sectors—are making it more difficult to control inflation. According to Jonathan Heath, Banxico’s Deputy Governor, these factors are placing additional pressure on prices while at the same time limiting the ability of monetary policy to effectively influence inflation dynamics.
The central bank expressed concern following the spike in annual inflation to 4.22% during the first half of May, which surpassed its target range of 3% ±1 percentage point. Despite this increase, the Board of Governors ruled out that the country is close to a recession. Their central projections point to economic growth this year of only 0.1%, though the most pessimistic forecasts anticipate a slight contraction of up to -0.5%. This context of low growth confirms the slowdown observed, especially after the gains in 2023 and the early part of 2024.
In Heath’s words, although lower economic activity is expected to help bring inflation gradually back toward the central bank’s target in the coming months, significant challenges remain regarding price developments. He noted that while inflation in the services sector remains below 5%, the pricing behavior in these services has not yet fully reflected the economic slowdown. Volatility in tourism and entertainment services has contributed to recent increases, suggesting that the uptick is not due to a broad-based trend but rather to isolated episodes.
Pamela Díaz Loubet, Chief Economist at BNP Paribas, interpreted Banxico’s remarks as an acknowledgment that current inflationary pressures require a more cautious approach. She explained that, although upward surprises in inflation have not been widespread, there are factors that prevent assuming an automatic return to a downward path in the price index. Omar Mejía, another Banxico Deputy Governor, reiterated that the recent uptick is transitory and is mainly driven by specific, highly volatile components within the services sector.
Despite the economic stagnation scenario forecast by some specialists and Banxico members, Governor Victoria Rodríguez Ceja stated that a recession is not expected this year. However, she acknowledged that the Mexican economy is currently experiencing a marked slowdown and that risks remain tilted to the downside. In this regard, the Board of Governors reiterated their commitment to closely monitor macroeconomic indicators and stand ready to take action should greater risks to price stability arise.
In summary, Mexico’s economic outlook for the remainder of the year is characterized by persistent and significant challenges, both internal and external, which complicate the fight against inflation. Despite the slowdown and upward pressure on prices, Banxico is maintaining a prudent perspective—avoiding predictions of a recession but highlighting the need to keep a close watch on downside risks. This environment calls for a cautious monetary policy stance, staying alert to new challenges that may emerge for the national economy.
