Mexico’s GDP grew by 0.2% in the second quarter, up slightly from 0.1% first-quarter growth. Year-over-year growth slowed to 1.0%, down from 1.8% in the first quarter. We expect full-year growth in a range of 1.75%–2.25%. However, we’ll be watching for signs of restrictive policy rates weighing on consumption and fixed asset investment.

Core inflation has fallen steadily since the beginning of 2023. We expect that it will finish 2024 near the upper end of the 2%–4% target range set by the Bank of Mexico (Banxico), but we don’t foresee it falling to the 3% midpoint until late 2025. The last mile in the inflation fight is proving challenging, as strong wage growth from a tight labor market has buoyed spending, keeping services prices elevated. 

On September 26, for the third time this year, Banxico cut its target for the overnight interbank rate by 25 basis points, to 10.5%. Banxico noted that “although the outlook for inflation still calls for a restrictive monetary policy stance, its evolution implies that it is adequate to reduce the level of monetary restriction.” Vanguard anticipates an additional 25 to 50 basis points of cuts in 2024, to a year-end range of 10%–10.25%, levels that would still be restrictive.¹

The labor market remains robust, with year-over-year employment growth reaching its prepandemic average of 3.7%. The market’s strength continues to support strong wage growth. An unemployment rate near historical lows stands below what Banxico considers the nonaccelerating inflation rate of unemployment, or NAIRU, suggesting continuing upward pressure on wages and inflation.