Inflation Down, But Banxico Faces Challenges to Lower Interest Rates
14:37 10/09/2024 - PesoMXN.com
August's inflation unexpectedly surprised the market by hitting 5%. However, while this figure is encouraging, analysts argue that the Bank of Mexico (Banxico) shouldn't celebrate just yet or consider another interest rate cut. Why? Uncertainty in the exchange rate due to the potential approval of a judicial reform is a key factor. "One single data point doesn't establish a trend. The inflation outlook is still clearly tilted upward. Although the August figure represents a sigh of relief, it doesn’t mean the situation is entirely favorable," commented Ángel Huerta, an economic analyst at Grupo Financiero Ve por Más (Bx+).
The expert emphasized that, despite the good news regarding inflation, it's necessary to wait for the coming months as pressures from both internal and external factors may arise. Domestically, high service prices and exchange rate uncertainty persist; inflation in services still lacks a clear downward direction, remaining above 5%. Banxico's Board of Governors will need to act cautiously in their upcoming decisions, Valmex agreed in a report. Huerta also noted that the Board might not feel comfortable with certain aspects such as Mexico's risk perception and exchange rate fluctuations. Since the results of the presidential election, where Claudia Sheinbaum won decisively, markets have become volatile due to uncertainty surrounding the reforms that could be approved, especially the one related to the judiciary. This reform is one of the most controversial proposals from President Andrés Manuel López Obrador, introduced on February 5, aiming to establish the popular election of ministers and limit their salaries to the maximum earned by the president. Since sessions resumed in Congress and the Chamber of Deputies in September, the exchange rate has reached 20 pesos due to the uncertainty this reform may generate. The volatility won’t depend solely on events in Mexico; this Tuesday, Republican candidate Donald Trump and Democratic candidate Kamala Harris will face off in a pre-election debate in the United States, and their proposals will also influence the exchange rate fluctuations, which in turn will impact the central bank's decisions.
The current economic situation in Mexico highlights the importance of internal and external stability to keep inflation under control. Decisions by the central bank are not only affected by local economic data, but also by the international environment, underscoring the interconnection of economies in a globalized world. It is crucial that prudent measures are taken that not only seek temporary relief but also establish solid foundations for sustainable long-term growth.
