Mexico City.- The five members of the Governing Board of the Bank of Mexico (Banxico) pointed out that productive activity is going through a period of weakness, however, some of them pointed out that a recession phase is not expected in the country.
The majority indicated that there has been a visible loss of dynamism since the last quarter of 2023, according to the most recent minutes of the central bank from its meeting on September 25.
One of them attributed the economic weakness to the uncertain environment associated with idiosyncratic factors, as well as the expectation of lower activity in the United States, and the development of the electoral process in that country. “Another member estimated that the lack of economic dynamism is a consequence of the stagnation of manufacturing production in the United States, which affects the export sector, and a slowdown in investment, which usually occurs when there is a change of government.
“He considered that despite the signs of slowdown, an economic contraction is not anticipated,” the minutes indicated.
In that sense, the majority of the Board added that the information available from the Global Indicator of Economic Activity (IGAE) for the beginning of the third quarter shows a certain rebound. Regarding the behavior of activity by sector, at least two members of the Board emphasized the slowdown in secondary and tertiary activities, and warned that within the manufacturing sector there is a general weakening of its components. Regarding domestic demand, the majority indicated that consumption slowed due to a contraction in spending on imported goods, while on the investment side, they indicated that all of its items have maintained a lack of strength since mid-2023. Regarding inflation, the majority of the Board agreed that the inflation outlook in Mexico has been improving, after the deep global shocks of previous years. However, he warned that he still faces challenges, among them he highlights that service inflation continues to exhibit persistence. One member argued that the dynamics of service prices have been highly correlated with the evolution of salaries, which has led to relevant costs in several key subcomponents, such as housing and other services. Under this scenario, the Governing Board assessed that, although the inflationary outlook still warrants a restrictive stance, the evolution it has presented implies that it is appropriate to reduce the degree of monetary tightening, which is why it decided by majority to reduce 25 basis points to its interest rate, at a level of 10.50 percent. Going forward, Banxico left open the possibility of making additional adjustments to the reference rate in the last two monetary policy announcements remaining in the year. The bank’s Governing Board is made up of Governor Victoria Rodríguez and four deputy governors: Galia Borja, Irene Espinosa, Jonathan Heath and Omar Mejía. It should be noted that this meeting was the last attended by the Undersecretary of the Treasury, Gabriel Yorio, after formalizing his resignation from office on September 30.
Heath opposition
Deputy Governor Jonathan Heath was the dissenter in the Board vote by choosing to maintain the reference rate at a level of 10.75 percent, as he indicated that patience is required for the current monetary stance to have the desired effect on the persistence in the service inflation. Furthermore, he argued, starting a cycle of monetary relaxation prematurely could send a signal of complacency and that one is satisfied with high general inflation. “At the moment, we need a little more time both to confirm the trend that the positive signals seem to suggest, as well as to evaluate whether we need to adjust our reaction function to the global cyclical and monetary conditions that lie ahead in the coming months,” explained the deputy governor.
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