By Gabriel Araujo
(Reuters) – Mexico’s statistics agency INEGI released on Thursday a series of data showing that inflation slowed more than expected while growth remained tepid, opening the door for the country’s central bank to deliver a new interest rate cut next month.
The Bank of Mexico (Banxico) lowered its benchmark interest rate to 10.75% from 11% in a split vote in early August, despite higher forecasts for year-end headline inflation, and reinforced its view on Thursday that further policy adjustments were on the table.
Another rate cut when policymakers meet again on Sept. 26 is now seen as more likely, especially after INEGI reported that annual inflation undershot market forecasts in its mid-August print, easing more than expected.
In Latin America’s second-largest economy, 12-month headline inflation came in at 5.16% in the first half of August, down from the 5.61% registered a month earlier and below the 5.31% forecast by economists polled by Reuters. That is still well above the bank’s 3% inflation target, plus or minus 1 percentage point.
The closely monitored core consumer price index – seen as a better gauge of price trends because it strips out volatile energy and food prices – continued to ease, with the annual reading falling below 4% for the first time since early 2021.
“Was Mexico’s August rate cut justified? Below-consensus bi-weekly headline and core CPI say ‘yes’,” VanEck’s chief emerging markets economist Natalia Gurushina said.
“However, further disinflation and sizable fiscal consolidation are key to avoid the perception of running ahead of the curve.”
Two members of Banxico’s five-person board spoke out against the recent rate cut, saying the move undermines the central bank’s credibility as the bank upped its forecast for year-end headline inflation to 4.4%, from 4.0% previously.
But if the moderation in consumer prices is confirmed in the second half of August, analysts at CIBanco said in a note to clients, the possibility of a new cut by Banxico at its next meeting increases.
TEPID GROWTH
Soft economic activity might lend some additional support to the board’s more dovish members.
INEGI data on Thursday showed that Mexico’s gross domestic product (GDP) expanded 0.2% in the second quarter from the previous three-month period, in line with market expectations but reinforcing a slowdown trend seen since late last year.
In annual terms, growth in the April-June quarter sat at 2.1%, while economists polled by Reuters and a preliminary estimate released by INEGI last month had pointed to a 2.2% expansion.
Banorte economists said the Mexican economy faces “relevant challenges” in the second half of the year. Some bright spots might emerge, they added, but acknowledged there were downside risks to their own 1.9% annual GDP growth forecast.
Economic activity in June, INEGI added in a separate report, was unchanged from the previous month and dropped 0.6% on a yearly basis – both below consensus.
“The August mid-month CPI print, alongside the weak activity data for June and the Fed’s confirmation that it will kick off its loosening cycle next month means that we expect Banxico to lower its policy rate by another 25 basis points in September,” Capital Economics economist Kimberley Sperrfechter said.
(Reporting by Gabriel Araujo, Natalia Siniawski, Ricardo Figueroa and Luana Maria Benedito; Editing by Anthony Esposito and Diane Craft)
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