Bank of Mexico Lowers Interest Rate

MEXICO CITY (Reuters) – The Bank of Mexico lowered its benchmark interest rate by 25 basis points to 10.50% on Thursday, marking the second consecutive cut as price pressures ease in Latin America’s No. 2 economy.

The bank adopted a cautiously optimistic tone regarding the potential for further cuts to the key borrowing rate.

The latest rate cut, approved by the central bank’s five-member governing board, was not unanimous. Deputy Governor Jonathan Heath voted to maintain the rate at 10.75%.

Analysts polled by Reuters had largely anticipated the 25-basis-point cut.

In a statement, Banxico, as the central bank is known, highlighted an improved global inflation outlook and noted that the closely monitored core inflation rate, a reliable indicator for price trends, is expected to continue diminishing.

“Looking ahead, the board expects that the inflationary environment will allow further reference rate adjustments,” the statement emphasized, while also cautioning that the inflation outlook still necessitates a restrictive monetary policy stance.

Mexico’s annual headline inflation slowed to 4.66% in the first half of September, according to official data released Tuesday, marking its fourth consecutive fortnight of declines. Core inflation decreased to 3.95%, the lowest since early 2021.

In August, Banxico also cut its benchmark interest rate by a quarter percentage point to 10.75% in a divided decision, concurrently revising its year-end forecast for rising consumer prices.

Heath and fellow Deputy Governor Irene Espinosa voiced concerns that reducing rates without greater certainty around inflation’s trajectory could undermine the bank’s credibility.

On Thursday, Banxico adjusted its forecast for annual headline inflation in the fourth quarter downward to 4.3%, from 4.4% previously, along with core inflation expectations to 3.8% from 3.9%.

The Mexican peso strengthened by 0.4% immediately after Thursday’s announcement but later traded flat.

Post-decision, Fitch Ratings director Carlos Morales indicated expectations of upward inflationary pressures on the peso due to uncertainties surrounding a range of government-led constitutional changes. Nevertheless, Fitch anticipates a continued downward trend in overall inflation and cheaper money moving forward.

“We now anticipate further rate cuts in the latter part of the year, with subsequent cuts occurring throughout next year,” Morales stated.