Mexican Peso Declines Amid Weak Consumer Spending and Rate Cuts

Mexican Peso Declines Amid Weak Consumer Spending and Rate Cuts

2024-12-30 @ 10:02

Recent Economic Trends Impacting the Mexican Peso

The Mexican peso has recently experienced a decline, ending the week on a negative note. This downturn is attributed to several factors, including weak consumer spending and recent rate cuts by the Bank of Mexico (Banxico).

Consumer Spending and Economic Indicators

Consumer spending in Mexico has shown signs of slowing down. According to data from the Instituto Nacional de Estadística y Geografía (INEGI), retail sales for October fell both annually and monthly[2][5]. This decline in consumer spending indicates a broader economic slowdown, which has weighed on the peso.

– Key Economic Indicators:

Consumer Spending in Mexico increased to 18254608.43 MXN Million in the third quarter of 2024 but showed a decline in retail sales for October[5].

Retail Sales for October fell annually and monthly, highlighting the economic slowdown[2].

Monetary Policy and Rate Cuts

Banxico recently lowered its benchmark rate by 25 basis points to 10%, aligning with market expectations[1]. However, the central bank’s projection that inflation will not return to the 3% target until mid-2026 has introduced additional uncertainty, impacting investor confidence.

– Monetary Policy Developments:

Banxico cut its benchmark rate by 25 basis points to 10%, in line with forecasts[1].

The central bank projects inflation to remain above target until mid-2026, adding to market uncertainty[1].

Inflation and Economic Outlook

Mexico’s headline inflation moderated to 4.44% year-on-year in the first half of December but exceeded expectations and remained above the central bank’s 3% target. Core inflation unexpectedly rose to 3.62%, indicating persistent price pressures within the economy[1].

– Inflation Trends:

Headline inflation moderated to 4.44% but remained above the central bank’s target[1].

Core inflation rose to 3.62%, signaling ongoing price pressures[1].

Global Economic Context

The US Federal Reserve’s recent decision to cut interest rates has provided Banxico with more flexibility in its monetary policy decisions. Analysts suggest that maintaining the current spread between Banxico and the Fed rates could be favorable for the peso in the medium term[3].

– Global Economic Influences:

The Fed’s rate cut has given Banxico more flexibility in its monetary policy[3].

Maintaining the current rate spread could stabilize the peso[3].

Market Expectations

Despite the current decline, the Mexican peso had previously appreciated due to prospects of a Fed rate cut and mixed US economic data. The interest rate differential has been a key factor in the peso’s performance[4].

– Market Trends:

The peso had previously appreciated due to Fed rate cut expectations and mixed US data[4].

The interest rate differential has influenced the peso’s performance[4].