Mexico City.- In a split decision, the Bank of Mexico (Banxico) cut its benchmark interest rate by 25 basis points to 10.75 percent, even though inflation in the country has been picking up and the “super peso” has lost momentum.
The general inflation rate rose for the fifth consecutive month, reaching 5.57 percent in July, its highest level in 14 months, the National Statistics Institute (INEGI) reported earlier on Thursday.
“Financial markets in Mexico suffered from the volatility of international markets. The Mexican peso depreciated,” Banxico said in its monetary policy statement on Thursday.
“In the second quarter, productive activity registered low growth, thus extending the weakness that it has exhibited since the end of last year,” he added.
Banxico Governor Victoria Rodríguez, Deputy Governor Galia Borja and Deputy Governor Omar Mejía voted in favor of the decision. Meanwhile, Deputy Governor Irene Espinosa and Deputy Governor Jonathan Heath were in favor of maintaining it at 11.00 percent.
“Annual headline inflation rose to 5.57 percent in July due to a significant increase in the non-core component, which is more volatile. Core inflation, which better reflects the inflation trend, added 18 consecutive months of reductions in July 2024. In this month, it stood at 4.05 percent. Its impact on annual headline inflation rose from a maximum value for this inflationary episode of 6.32 percentage points in November 2022 to 3.07 percentage points in July 2024,” Banxico said.
“As a result, overall inflation expectations for the end of 2024 increased. On the other hand, those corresponding to the underlying component decreased,” he added.
The Bank’s Governing Board stated that it considered the nature of the shocks that have affected the non-core component and the expectation that their effects on headline inflation will dissipate in the following quarters.
“It took into account the path that the underlying component has followed and that it is expected to continue falling. It assessed that, although the inflationary outlook still warrants a restrictive stance, the evolution it has shown implies that it is appropriate to reduce the degree of monetary tightening,” it said.
“Going forward, the inflationary environment is expected to allow for discussion of adjustments to the reference rate,” he noted.
Analysts at Barclays had noted that Banxico had been slow to react, possibly waiting for the US Federal Reserve (Fed) to react as services inflation eased. The Fed is expected to cut rates at its next meeting in September and probably again in December.
At its meeting in late June, in light of the post-election volatility of the Mexican peso and the rise in inflation in the country, the Bank of Mexico had left its reference rate at 11.00 percent.
At that time, Governor Victoria Rodríguez, deputy governors Galia Borja and Irene Espinosa and deputy governor Jonathan Heath spoke in favor of maintaining the rate, while Omar Mejía voted to reduce the key rate by 25 basis points.
In March, Banxico cut its interest rate for the first time in three years, finally joining a regional trend of monetary easing, amid signs that prices were beginning to fall, but after slowing, general inflation has picked up.
Bank of America (BofA) specialists expected Banxico to leave its interest rate unchanged, noting that it faces a rather complex scenario with inflation still far from its 3 percent target and the depreciation of the peso since the last monetary policy decision in July.
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