Sustained Decline In Mexico's Inflation, But Still Far From Target

(MENAFN- Investor Ideas) Investorideas ( ), a go-to platform for big investing ideas releases market commentary fromQuasar Elizundia,expert research strategist at Pepperstone.

"The annual inflation rate in Mexico fell for the second consecutive month, reaching 4.58% in September 2024, its lowest level since March of this year and below market expectations of 4.62%. This result represents significant relief for the bank of Mexico (Banxico), which had been dealing with a context of inflationary pressures and exchange rate volatility in the first half of the year.

The moderation in inflation was primarily due to the continued decline in the prices of food and non-alcoholic beverages, especially fruits and vegetables, as well as a slowdown in public service and transportation prices. In comparison, the annual inflation rate stood at 4.99% in August, highlighting the importance of this recently observed slowdown.

As for core inflation, which excludes the most volatile prices and is key to Banxico's monetary policy decisions, a significant decrease was also observed. The annual core rate fell to 3.91% in September, its lowest level since February 2021, compared to 4% recorded in August. This sustained decline has been a key factor in the central bank's ongoing pursuit of a normalization policy.

It is worth noting that, despite these encouraging figures, Bank of Mexico has only managed to implement three 25 basis point cuts to its benchmark interest rate so far in 2024. This contrasts with the more aggressive normalization policies seen in other central banks in the region, such as in Chile or Colombia. The volatility of the Mexican peso, along with the inflationary pressures that marked the first half of the year, has limited Banxico's ability to act more decisively.

The inflation results for September exceeded the central bank's own forecasts. It is worth recalling that in its last meeting on September 26, Banxico had projected inflation of 5.1% for the end of the third quarter, while the latest reading has already come in below that threshold. Even so, the challenge persists, as the targets for the fourth quarter stand at 4.3%.

Looking ahead to the next monetary policy meeting in November, it is highly likely that Banxico will adjust its inflation forecasts downward and continue with its rate-cutting policy. However, significant uncertainties remain, particularly on the international front. The possibility that the U.S. presidential elections, also scheduled for November, could see the return of Donald Trump to the White House may introduce an additional element of volatility that the central bank will have to consider.

In summary, the decline in inflation in Mexico in September provides a window of opportunity for the Bank of Mexico to continue easing its monetary policy. However, the international context and peso volatility could limit the room for maneuver. It will be crucial to observe how the international environment develops in the coming weeks, especially with the upcoming key political events in the United States..."

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