Mexico central bank shrinks 2024 GDP growth forecast to 1.5%

By Sarah Morland

MEXICO CITY (Reuters) -The Bank of Mexico cut its forecast for economic growth this year and next, according to the central bank's quarterly report on Wednesday, citing weaker foreign manufacturing demand while inflation remains stubborn.

The central bank for Latin America's No. 2 economy now expects 2024 gross domestic product growth of 1.5%, down from a previous forecast of 2.4%, and 1.2% growth next year from a prior forecast of 1.5%.

Banxico, as the central bank is known, said it had reduced this forecast due to weaker-than-expected second-quarter growth, noting external demand should remain soft due to expected weakness in U.S. manufacturing as well as fewer public infrastructure projects boosting domestic construction.

"We expect the economy to keep growing in the coming quarters, though at a more moderate pace," bank Governor Victoria Rodriguez said on a call, saying that U.S. manufacturing should recover and help fuel growth next year.

Official statistics last week showed that Mexico's GDP expanded 0.2% in the second quarter from the previous three months, reinforcing a slowdown trend seen since late last year.

The monetary authority raised its inflation forecasts and said it sees the balance of risks regarding inflation as biased to the upside, after previously regarding this as balanced.

However, it maintained its forecast that both inflation metrics should converge toward its 3% target by the fourth quarter of next year.

For this year, Banxico edged up its fourth-quarter core inflation forecast to 3.9% from 3.8%, while headline inflation is expected to hit 4.4% by the last quarter of this year, up from prior guidance of 4%.

The central bank pointed to expected price rises affecting produce and energy, as well as stubborn services inflation, which the report said remains high without showing a clear downward trajectory.

"We need to break this persistence," said Deputy Governor Jonathan Heath. "Once services inflation starts to show a clear downward tendency, I would say we would be much closer to winning this battle."

Annual inflation ran at 5.16% in the first half of August, gradually cooling from a two-decade peak in 2022 while remaining stubbornly far from the 3% target.

However, the bank said in its report it expects the inflationary environment to allow discussion of further cuts to the benchmark interest rate.

Earlier this month, Banxico lowered its benchmark interest rate by 25 basis points to 10.75% in a divided vote, signaling that prices could still rise higher than previously expected.

(Reporting by Sarah Morland; Editing by Cassandra Garrison, Sarah Kinosian and Rod Nickel)