The Bank of Mexico (Banxico) delivered a half-point (50 basis points) cut to its benchmark interest rate on Thursday, citing cooling inflation and weakness in the country’s economy.

Mexico’s central bank stepped up the pace of its monetary easing following five 25-basis-point cuts last year and said it would consider additional reductions of the same size. The rate is now 9.5%. 

The decision was not unexpected, the Wall Street Journal reported, after Mexican President Claudia Sheinbaum reached an agreement with U.S. President Donald Trump on Monday to hold off placing 25% tariffs on Mexican imports.

Had the tariffs been imposed, there was concern the peso would weaken sharply against the U.S. dollar. This would likely have prompted the central bank to cut the interest rate by a quarter of a percentage point, or even put the easing cycle on pause, according to the news agency Reuters.

Banxico’s board of governors voted 4-1 to lower the overnight interest-rate target to 9.5%, saying in a statement that it “anticipates that the inflationary environment will allow continuing the rate-cutting cycle, albeit maintaining a restrictive stance.”

Annual inflation in Latin America’s second-biggest economy slowed to its lowest level in almost four years in the first half of January. Mexico’s 12-month headline inflation reading came in at 3.69%, putting it within the bank’s target of 3%, plus or minus one percentage point.

Banxico Deputy Governor Jonathan Heath was the lone dissenting voice, voting to lower the benchmark rate by just a quarter point to 9.75%. Even so, Heath had said in December that a 50 basis-point cut in February was quite possible.

The prospect of a rate cut was also boosted by data showing Mexico’s economy contracted by 0.6% in the fourth quarter, the first quarter-on-quarter contraction in more than three years, according to Reuters.

Banxico’s decision came one week after the U.S. Federal Reserve kept its key interest rate steady at the 4.25%-4.5% range during its January meeting, in line with expectations. The U.S. central bank paused its own rate-cutting cycle after three consecutive reductions in 2024 that totaled a full percentage point.

With Mexico’s inflation back in the target range and the slowing economy, Banxico could be encouraged to continue cutting rates.

“The Board estimates that looking forward, it could continue calibrating the monetary policy stance and consider adjusting it in similar magnitudes,” policymakers wrote in the statement accompanying their decision.

Mexico’s interest rate is now at its lowest level since September 2022, and Thursday’s announcement narrows the gap between borrowing costs in Mexico and the U.S.

With reports from The Wall Street Journal, El Financiero, Bloomberg News and Reuters