Inflation, rate cuts and economic stagnation

Mexico is experiencing a unique moment in terms of economic growth, persistent inflation, and the downward trend of Banxico's benchmark rate.

Slack is the adjective that best reflects economic behavior. Uncertainty is the status quo, surrounding rising prices despite the sluggish economic momentum.

At the same time, official triumphalism is evident regarding the latest reading of the National Consumer Price Index data.

Among analysts, opinions are divided.

While some consider monetary policy adequate, others warn of the upward risks of inflation and the reputational risk to the central bank.

Unsurprisingly, Banxico has cut its interest rate again.

The rate was reduced by 25 basis points, from 8% to 7.75%. The decision was made by a majority vote of four in favor and one against. Deputy Governor Jonathan Heath voted to maintain the rate at 8%.

The governing board's decision was released a few hours after INEGI reported that annual inflation stood at 3.51%, its lowest level since December 2020, and core inflation stood at 4.23% in July.

The central bank's decision was based on the continued cycle of benchmark rate cuts, in line with Mexico's inflation outlook.

Additionally, variables such as the exchange rate, the weakness of the economy, and the impact of global trade policies were taken into account.

Despite the increase in underlying inflation forecasts, Banxico's governing board deemed it appropriate to continue the cycle of interest rate cuts.

After four consecutive rate cuts of 50 basis points, it decided to reduce it by 25 basis points.

So far this year, the Bank of Mexico has reduced its benchmark interest rate from 10% to 7.75%.

The central institute's future guidance left the door open to further cuts.

It is striking that despite the sluggishness of the national economy, underlying inflation remains above 4 percent.

Among the most cautious analysts, there is a recommendation to the central bank to pause the cycle of interest rate cuts.

Others believe a further 25 basis point cut is likely, closing the year at 7.50 percent.

Banamex's economic analysis team anticipates that inflation will rebound to 4% overall and 3.9% core inflation by the end of the year. It forecasts an acceleration in commodity prices.

And for next year, it projects headline inflation of 3.9% and 3.8% respectively.

At her morning press conference, President Claudia Sheinbaum celebrated the inflation rate for July, which closed at an annual rate of 3.51%, the lowest monthly rate since 2020.

He said it is explained by policies to stabilize prices for basic consumer goods.

That's the way things stand. The truth is, it's too early to celebrate inflation. Uncertainty is the main risk factor, related to US tariff policies and their effects on the national economy.

Without forgetting that uncertainty due to internal factors is keeping investment levels low. At the same time.

ATT, for sale?

The news that ATT was about to sell its Mexican subsidiary for $2 billion spread widely.

What is striking is the amount it will supposedly sell for.

The data doesn't match what ATT has recorded: investments of more than $12 billion over 10 years.

Annual revenues exceeded $4 billion; last quarter they grew 10 percent.

Earnings before taxes and depreciation (EBITDA) reached nearly 650 million euros. This was up 28% year-over-year.

The company has accumulated positive numbers and increasing growth rates for the last five years in a very complicated and highly concentrated sector,

The alleged sale could be real due to the situation in which the regulator was eliminated, a very controversial telecommunications law was issued, and the government uses CFE to compete with public subsidies and high spectrum costs.

An additional question may arise: who would want to invest in such a complex environment?

And if the sale were to be confirmed, it would represent a strong blow to Mexico due to the negative signal for investments in Mexico.

Glimpses

The Rich and Powerful column will resume publication on August 18.