Bank of Mexico Lowers Key Interest Rate To 10.25%, Signals Potential For Further Cuts

The Bank of Mexico (Banxico) has lowered its benchmark interest rate by 25 basis points to 10.25%, marking the third consecutive rate cut in recent months.

The decision, made unanimously by Banxico’s five-member governing board, highlights the bank’s confidence in Mexico’s progress toward controlling inflation, particularly core inflation.

The move follows a broader global trend, with the US Federal Reserve also reducing borrowing costs by a similar amount just a week prior. Analysts had widely predicted the rate cut, and Banxico’s statement emphasised the improving inflationary environment. The central bank noted that core inflation, considered a key indicator of underlying price trends, is expected to continue decreasing.

In October, core inflation, which excludes volatile food and energy prices, slowed to 3.80%, down from 3.91% in September. However, headline inflation, which includes these volatile items, rose slightly to 4.76% from 4.58% in the previous month. Banxico’s official inflation target remains at 3%, plus or minus one percentage point.

Despite the slight uptick in headline inflation, Banxico expressed optimism about further rate cuts. “The Board expects that the inflationary environment will allow further reference rate adjustments,” the central bank said in its statement.

Banxico’s move comes as Mexico faces challenges linked to its currency and trade relations, especially in light of political uncertainty following the US election. The Mexican peso has depreciated sharply in recent months, fueled by concerns over domestic reforms and potential tariffs from the incoming Trump administration. Jason Tuvey, deputy chief economist at Capital Economics, noted that Banxico would closely monitor the peso and US-Mexico relations as it considers future rate decisions.

“The board left the door open to further interest rate cuts over the coming months, but officials will be keeping a close eye on the peso – especially if the incoming Trump administration steps up its threats to impose tariffs on Mexico,” Tuvey said.

Alberto Ramos, head of Latin America research at Goldman Sachs, expects Banxico to reduce rates further, predicting another 25-basis-point cut in December. However, he cautioned that the bank is unlikely to accelerate cuts to 50 basis points due to uncertainty surrounding the U.S.-Mexico trade relationship and other external factors.

Ramos said “the bar to accelerate the pace of cuts to 50 basis points is relatively high given prevailing domestic and external uncertainty, in particular around a number of issues in the U.S.-Mexico bilateral agenda.”

Banxico also revised its inflation forecast for the fourth quarter of 2024, projecting a slight increase but maintaining that inflation will converge to the bank’s target by the fourth quarter of 2025.

The decision reflects Banxico’s cautious optimism as it navigates both domestic and external economic pressures, with future rate cuts remaining on the table if inflation continues to ease.

Melissa Enoch

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