Mexico’s central bank, Banxico, is navigating a delicate balancing act as inflation continues to decline, hinting at more aggressive interest rate cuts while facing persistent challenges in controlling services prices. With inflation rates improving faster than anticipated, policymakers are considering their next moves to ensure sustained economic stability.
In September, annual inflation dropped to 4.66%, almost a full percentage point lower than in mid-July. Core inflation, which excludes volatile items, also showed signs of improvement. Despite this positive trend, Banxico Deputy Governor Jonathan Heath remains cautious. He emphasized that for inflation to meet the central bank’s 3% target, Mexico must focus on curbing the ongoing rise in services prices. These prices have remained stubbornly high, hovering above 5% for more than two years.
“The only way we can get core inflation to continue its downward trend to 3% next year, as is our projection, is to break the persistence of services prices,” Heath remarked in a recent podcast. His stance suggests that the central bank should maintain a restrictive monetary policy until these pressures ease.
On the other hand, Banxico’s Governor Victoria Rodriguez has expressed openness to considering larger interest rate cuts in the future, signaling that the central bank may become more aggressive if inflation continues to cool. Last week, Banxico lowered its key interest rate by 25 basis points to 10.5%, marking its second cut this year. While Heath voted against the move, preferring to keep rates steady, the overall trend points toward more easing in the coming months.
Banxico’s decisions are closely tied to broader global economic trends, particularly the policies of the U.S. Federal Reserve. Heath acknowledged that, over time, Mexico’s monetary policy will have to align with that of the U.S., particularly if the Fed continues to reduce rates.
As Mexico’s economy heads for slower growth for the third consecutive year, the possibility of more substantial rate cuts could have far-reaching implications. Lower interest rates may spur consumer spending and business investment, providing a boost to key sectors. However, the persistence of elevated services prices remains a critical challenge that could influence Banxico’s policy in the coming months.
All eyes will be on the central bank’s upcoming meetings, where further decisions on rate cuts and economic strategy will be made.
