Mexico’s Central Bank Cuts Interest Rate to 10.25% Amid Economic Shifts

Mexico’s central bank, Banco de México (Banxico), has reduced its benchmark interest rate by 25 basis points to 10.25%. This marks the third consecutive rate cut of the same magnitude.

The decision comes after a pause during the summer due to inflationary pressures and local currency volatility following Mexico‘s elections.

The rate cut occurs against a backdrop of declining core inflation in October and in the wake of the U.S. presidential election. This event caused some turbulence in financial markets.

Banxico’s move also follows the U.S. Federal Reserve’s second rate reduction in four years. Before Banxico‘s announcement, the peso traded at 20.47 per dollar, showing a 0.20% appreciation.

After the decision, the dollar briefly spiked to 20.53 pesos before settling around 20.50 pesos, reflecting a 0.04% peso appreciation. Several economists had anticipated this rate cut.

Jessica Roldán of Finamex Casa de Bolsa predicted the 25-basis-point reduction and expects another cut in December. Alfredo Coutiño from Moody’s Analytics shared this view but cautioned about the pace of monetary easing.

Banxico’s Inflation and Rate Cut Outlook

David Razú of Afore XXI Banorte agreed with the November cut but expressed uncertainty about December. He emphasized the need to monitor emerging pressures that might influence the bank’s decisions.

Banxico maintained its forward guidance, signaling potential future rate adjustments based on the inflationary environment. The bank revised its inflation forecasts upward for the short term due to supply shocks.

However, it still expects general inflation to reach its target by the fourth quarter of 2025. The bank cited several upside risks to inflation.

These include persistent core inflation, currency depreciation, cost pressures, climate effects, and geopolitical conflicts. Downside risks involve lower economic activity, reduced cost pressure pass-through, and less impact from currency depreciation.

Banxico acknowledged an improving inflation outlook despite recent global shocks. The bank pointed to core inflation’s behavior as evidence of this improvement.

The decision to cut rates considered the nature of shocks affecting non-core inflation and expectations of their dissipation. The central bank noted that while a restrictive monetary stance is still necessary, the evolving inflation picture allows for some easing.

Banxico also observed stronger economic growth in the third quarter of 2024 compared to the previous three quarters, though it anticipates sluggish growth next year.

This rate cut reflects Banxico’s balanced approach to managing inflation and supporting economic growth in a complex global environment. The bank continues to navigate challenges while maintaining its commitment to price stability and economic well-being.