Central bank cuts interest rate to lowest point in nearly 3 years

Mexico’s central bank lowered its benchmark interest rate by 50 basis points in a split vote on Thursday, while leaving the door open for further cuts.

The decision by the Bank of Mexico, or Banxico, was largely expected and is the fourth straight half-point reduction, bringing the rate to 8.0%, its lowest level in nearly three years.

Interest rates in Mexico

The five-member board of governors voted 4-1 to cut the overnight interest-rate, with Deputy Gov. Jonathan Heath, the sole dissenter, voting to hold the rate at its previous 8.5% level.

The Mexican peso gained just over 0.2% against the dollar following the central bank’s decision, Reuters reported.

Heath, who agreed with the rate cuts in earlier decisions, told Reuters he supported a “more cautious, more prudent” approach until inflation resumed a clear downward trajectory.

Annual headline inflation in Mexico, Latin America’s second-biggest economy, has risen in recent months, surpassing the central bank’s target range in May. It cooled slightly in the first half of June, hitting 4.51%, still well above the central bank’s target range of 3%.

Mexico central bank Deputy Governor Jonathan Heath
Deputy Governor Jonathan Heath was the sole dissenter in Thursday’s rate cut, favoring a more cautious approach. (CC BY-SA 4.0)

In its statement on Thursday, Banxico raised its forecast for year-end average headline inflation to 3.7% from the 3.3% it forecast in May, while reiterating its estimate that inflation will converge to 3% in the third quarter of 2026.

“Looking ahead, the board will assess further adjustments to the reference rate,” the central bank said, declining to specify that future half-point cuts were possible.

The bank noted moderate economic activity growth in April, but said uncertainty remains with trade tensions posing “significant downward risks.”

According to Reuters, Banxico is balancing dual challenges: “It is seeking to bring down inflation while also stimulating the economy amid weak economic growth and uncertainty tied to trade tensions and geopolitical developments.”

Thursday’s decision did not include language found in Banxico’s three most recent monetary policy decisions about considering future cuts of “similar magnitudes.”

“The accompanying communications were slightly less dovish and point to a slower pace of easing going forward,” Liam Peach, senior emerging markets economist at Capital Economics said in a note, according to the Wall Street Journal.

Reuters reported that Banxico is likely to slow its rate cuts the rest of the year, with private sector analysts projecting that the central bank will end 2025 with a benchmark rate of 7.5%.

With reports from Bloomberg News, El Financiero and Reuters

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