Unchanged rate differential: analysts

Even with the Bank of Mexico's narrow margin to maintain its restrictive policy, it could implement one or two additional rate cuts, analysts at Pantheon Macroeconomics and Goldman Sachs agreed.

Both expect the Federal Open Market Committee (FOMC) to implement a 25 basis point rate cut in its decision scheduled for September 17.

A week later, the Bank of Mexico is scheduled to make its sixth monetary policy decision of the year, and if it opts for a new 25-basis-point cut, it could keep the spread unchanged, they said.

That country's rate is relevant to Mexico because of the differential, which is the incentive it gives investors to stay in the market during times of uncertainty.

Currently, that differential stands at 325 basis points, resulting from the difference between Mexico's nominal rate (7.75%) and that of the United States (between 4.25 and 4.50 percent). As members of the Governing Board have explained, Mexico's historical rate differential before the pandemic is 400 basis points.

This means that the current incentive is below that differential.

"Even approaching neutrality with another rate cut, the extremely narrow spread between Mexico and the United States will remain contained," observed the Latin American economist at Goldman Sachs.

Indeed, a 25 basis point cut in both countries for the September decision will leave that yield unchanged and help continue to strive for inflation to approach the specific 3% target, he noted.

The next FOMC monetary policy decision is scheduled for September 17, and Mexico's decision is scheduled for September 25.

Sticky inflation forces Banxico to protect restriction

From London, Andrés Abadía, Pantheon Macroeconomics' chief economist for Latin America, observed that core inflation remains significantly rigid. He specifically referred to the services sub-index.

Core inflation is the purest indicator of inflation, as it excludes volatile prices due to seasonality or administrative decisions.

The underlying price index remains high, still trending above 4%, with consistent stability despite easing supply pressures, he noted.

According to data from INEGI (National Institute of Statistics and Census), core inflation has remained above 4% in the first eight months of the year and has remained unchanged at 4.44% in July and August.

For the Goldman Sachs economist, it's clear that this "sticky core inflation" is driving the Bank of Mexico to seek inflation converging toward the target, but it is forcing them to be even more cautious in calibrating monetary policy.

Negative output gap fuels cuts

The Goldman Sachs expert noted that the negative GDP gap and pessimistic growth outlook do not prevent the continuation of the monetary policy normalization cycle.

Meanwhile, the Pantheon Macroeconomics economist noted that the Mexican economy faces a complex, though positive, outlook, marked by a cautious recovery and persistent inflationary pressures.

Both anticipate that the central bank will raise the rate to 7.50% in its September 25 decision.

The U.S. interest rate is important for Mexico because of the differential, which is the incentive it gives investors to stay in the market during times of uncertainty.