Bank of Mexico's Governor: Inflation Fight Enters New Phase

The Bank of Mexico (Banxico) has entered a new phase in its battle against inflation, with Governor Alejandro Díaz de León acknowledging the challenge ahead. In a recent interview, Díaz de León emphasized the need for a balanced approach to monetary policy, aiming to control inflation while supporting economic growth and employment. This article explores the Bank of Mexico's strategy, the role of structural reforms, and the data supporting these efforts.



The Bank of Mexico has maintained a restrictive monetary policy stance, with interest rates at 11%. This measure has been effective in gradually reducing headline inflation, which is expected to decline to around 5.8% by the end of 2024 from higher levels seen in previous years (Dallas Fed) (BBVA Research). However, core inflation remains persistent, and services inflation is still high. To address these challenges, the central bank plans to gradually adjust interest rates as inflation pressures ease, while continuing to use structural monetary policy tools to incentivize funding for key areas of the real economy.



Structural reforms play a crucial role in the Bank of Mexico's strategy to combat inflation and ensure long-term success. By addressing the underlying causes of inflation, these reforms can help stabilize prices and promote sustainable economic growth. Some of the most critical structural reforms for long-term success include:

1. Improving the twin-pillar regulatory framework: The Bank of Mexico aims to enhance its monetary policy and macro-prudential policy framework to maintain currency value stability and financial system stability. This involves gradually shifting away from quantitative targets and placing greater emphasis on price-based tools such as interest rates, as well as enriching the monetary policy toolkit (Pan Gongsheng, Governor and Party Chief of the PBOC, August 15, 2024).
2. Promoting high-standard financial opening-up: The central bank seeks to deepen institutional opening-up in the financial sector, steadily and prudently advance the internationalization of the yuan, and create a more friendly and inclusive business environment. This can help attract foreign investment, foster competition, and improve the efficiency of financial markets (Pan Gongsheng, August 15, 2024).
3. Enhancing policy communication and transparency: The Bank of Mexico plans to boost policy communication, enhance policy transparency, and improve the mechanism for forestalling and defusing systemic risks. This can help market participants better understand and anticipate monetary policy decisions, fostering stability and confidence in the financial system (Pan Gongsheng, August 15, 2024).
4. Strengthening financial market infrastructure: The central bank aims to strengthen the financial market and its infrastructure, which can help improve the efficiency of financial intermediation, reduce transaction costs, and enhance the resilience of the financial system to shocks (Pan Gongsheng, August 15, 2024).
5. Promoting inclusive finance: The Bank of Mexico seeks to develop technology finance, green finance, inclusive finance, pension finance, and digital finance. These reforms can help expand access to financial services, promote financial inclusion, and support sustainable economic growth (Pan Gongsheng, August 15, 2024).

By implementing these structural reforms, the Bank of Mexico can better address the root causes of inflation, improve the resilience of the financial system, and foster long-term economic growth. However, the effectiveness of these measures will depend on global economic conditions and the ability of the central bank to maintain a balanced approach between growth stabilization and risk prevention.

In conclusion, the Bank of Mexico's governor has acknowledged the new phase in the inflation fight, emphasizing the need for a balanced approach to monetary policy. By implementing structural reforms and maintaining a restrictive monetary policy stance, the central bank aims to control inflation while supporting economic growth and employment. The success of these efforts will depend on the central bank's ability to navigate global economic conditions and maintain a balanced approach to monetary policy.