Bank of Mexico lowers key interest rate, opens door to larger cuts
4:06 pm Thursday, December 19th, 2024
By Brendan O’Boyle, Anthony Esposito
MEXICO CITY (Reuters) -Mexico’s central bank lowered its benchmark interest rate by 25 basis points to 10.00% on Thursday and signaled larger rate cuts could be considered in future meetings given progress on inflation in Latin America’s second-largest economy.
The unanimous decision by the Bank of Mexico’s five-member governing board is the fifth rate cut this year since it started lowering borrowing costs from a record high of 11.25% in March.
The rate reduction came after headline inflation slowed slightly more than expected last month and a day after the U.S. Federal Reserve cut by the same magnitude.
“In view of the progress on disinflation, larger downward adjustments could be considered in some meetings, albeit maintaining a restrictive stance,” Banxico, as the bank is known, said in a post-meeting statement.
Analysts had forecast the 25-bps cut after annual headline inflation slowed in November to 4.55%, below both the 4.59% expected by economists in a Reuters poll and the October figure of 4.76%.
Mexico’s closely watched core consumer price index, seen as a more reliable measure of price trends as it excludes volatile energy and food prices, fell to 3.58% in the 12 months through November, from 3.80% in October.
Banxico targets inflation at 3%, plus or minus a percentage point.
While both headline and core inflation are still forecast to follow a downward trend, the board raised its year-end inflation forecasts for 2024 and 2025.
The board now sees headline inflation reaching the 3% target in the third quarter of 2026, later than the board’s previous guidance of the fourth quarter of 2025.
After the board’s unanimous cut in mid-November, Mexican markets were rattled by U.S. President-elect Donald Trump’s threat of a 25% across-the-board tariff on imports from Mexico.
Thursday’s statement referenced the Mexican peso’s volatility amid “the possibility of measures that could weaken integration with our main trading partner.”
The peso reversed earlier losses and strengthened marginally against the dollar following Banxico’s rate decision.
In light of the peso’s recent volatility and the threat of U.S. tariffs under Trump, some analysts questioned whether Banxico could really enact larger interest-rate cuts.
“We doubt that Banxico will step up the pace of easing anytime soon. With the peso vulnerable to sharp falls if Trump slaps tariffs on Mexico, fiscal risks lingering and the Fed in a hawkish mood, we think that Banxico will continue to cut its policy rate in 25bp steps,” said Kimberley Sperrfechter, emerging-markets economist at Capital Economics.
(Reporting by Brendan O’Boyle and Anthony Esposito; Editing by Rod Nickel)
