The other side of the dilemma

Two weeks ago, the title of this column called for the Bank of Mexico to adopt a more measured approach in the face of inflation data that has been pushed upward in recent months.

Ultimately, Banxico effectively withdrew its intention to lower the interest rate by another half point from its statement and explained that future actions will depend on what the data shows.

The debate over how far the downward cycle can go is taking place among those who, appealing to the central bank's sole mandate, are concerned that much of the pressure is being exerted on the underlying component of inflation; that is, on inflation that is not traditionally volatile.

At the last meeting of the Governing Board, Deputy Governor Heath voted not to further reduce the reference rate, probably on this grounds.

However, some are citing the weakness of the economy to justify a possible further decline, perhaps even lower than the 7.5% expected by the consensus of analysts.

According to the Bank of Mexico, economic slack refers to the degree to which the economy operates below its potential capacity, without generating inflationary pressures; that is, with resources (labor, production, investment) not fully utilized.

On previous occasions, the existence of positive slack was used as an argument to adjust rates upward without affecting the growth path. The problem is that this time, the slack has turned negative.

If you don't understand what I'm talking about, just keep in mind that economic growth is projected to be close to zero this year.

The Bank of Mexico itself has revised its estimate downward to 0.1% and also estimates growth of 0.9% in 2026. The gap tends to be negative: "The point estimate of the output gap is expected to widen into negative territory throughout 2025 and 2026, consistent with the greater weakness expected in economic activity..." (Bank of Mexico, Quarterly Inflation Report, January–March 2025).

It turns out that the data we've seen in recent days supports the view of an economy that has deepened its weakness in the second quarter.

The Mexican Social Security Institute (IMSS) reported a monthly decrease of 46,378 jobs in June, representing the third consecutive monthly decline.

In the month, permanent jobs increased by 18,000 units, while temporary jobs contracted by 64,000 units.

During the January-June period of this year, around 87,000 jobs were created, at least 100,000 below the minimum number created in the last 10 years, excluding 2020, which was affected by Covid-19.

The annual variation in jobs by economic sector comparing June 2024 with June 2025 is mainly due to the (-) 8.2% decrease in the construction sector, both due to the current uncertainty caused by President Donald Trump's tariffs, as well as the completion of the emblematic works of the previous administration.

The lack of new job creation so far in 2025 is affecting private consumption. We've heard anecdotal information to the same effect. May and June were bad months for commercial sales.

It's understandable that weakness is an argument supporting the idea that price pressure is temporary. But it's precisely in goods and services where we see the greatest pressure. There may be many causes, one of them being that the monopolistic power of many companies is reflected in the transmission of higher costs to consumers.

In any case, Banxico has a unique mandate; it's not its responsibility to implement policies to support economic activity if inflation remains depressed. I believe that, in the end, the downward path for interest rates is limited, and growth will remain quite poor for a prolonged period.

*Rodolfo Campuzano Meza is the general manager of INVEX Investment Fund Operator.