By Brendan O’Boyle

MEXICO CITY (Reuters) – The Bank of Mexico could increase the size of cuts to its benchmark interest rate in future meetings as inflation eases in Latin America’s second-largest economy, minutes from the central bank’s December monetary policy meeting showed on Thursday.

Banxico, as the Mexican central bank is known, lowered its benchmark interest rate by 25 basis points to 10.00% in a unanimous decision by its governing board last month.

“In view of the progress on disinflation, larger downward adjustments could be considered in some meetings, albeit maintaining a restrictive stance,” the minutes said. 

A breakdown of the board members’ positions showed three of the five members supporting the discussion of larger rate cuts.

Banxico began a rate-cutting cycle last March amid easing inflation, ultimately delivering five 25-basis-point cuts to bring the benchmark rate down from the record 11.25% that it reached in 2023.

The minutes “show that there is a consensus to continue lowering the rate at the next meeting, although there are differences in the pace at which this could occur,” Actinver Research said in a note.

DISINFLATION PROGRESS

One of Banxico’s board members pointed to “the undeniable progress in disinflation” to support their view that “it is necessary to increase the magnitude of rate cuts in some of the upcoming monetary policy decisions.”

Another member highlighted “the importance of communicating that adjustments of larger magnitude could be implemented at the next policy meetings.”

Banxico has taken a more hawkish approach to monetary easing than that of some of its Latin American counterparts, like Brazil and Uruguay, which have begun raising rates again after bringing them down quickly only to see inflation rebound.

Two board members remained cautious, warning against premature monetary easing, with one “committed hawk” alerting against “accelerating the pace of easing or signaling that it could be done at future meetings,” said Alberto Ramos, chief Latin America economist at Goldman Sachs.

Still, a majority of directors acknowledged that the inflation outlook continued to improve, even though the board revised its year-end inflation forecasts for 2025 higher.

“Most members stated that the revision in forecasts does not suggest an interruption in the disinflation process, but rather a more gradual reduction in headline and core inflation,” the minutes said. 

Data published earlier on Thursday showed Mexico’s annual headline inflation rate fell more than expected in December, reaching 4.21%.

Banxico targets inflation at 3%, plus or minus one percentage point.

Board member Jonathan Heath later said in a social media post on Thursday that the December inflation reading was “good news,” noting that it was the first month in which inflation fell below the 4.26% level logged in October 2023.

Given the inflation outlook, Goldman Sachs sees the bar to increase the pace of rate cuts to 50 basis points as “not excessively high,” said Ramos, while Actinver sees a higher probability of a 25-basis-point cut from Banxico in February, “without ruling out the possibility of a 50-basis-point adjustment.”

(Reporting by Brendan O’Boyle; Editing by Kylie Madry and Paul Simao)

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