Mexico's Central Bank Cuts Interest Rate Despite Core Inflation Concerns

• The Bank of Mexico(Banxico) cut its benchmark interest rate to its lowest level since May 2022 on Thursday and indicated it would consider further easing at future meetings, amid ongoing concerns about global trade tensions and sluggish economic growth in Latin America's second-largest economy. Banxico, as the central bank is known, reduced its benchmark interest rate by 25 basis points to 7.5% in a divided vote. Deputy Governor Jonathan Heath was the sole member of the five-member board who voted to hold the interest rate at 7.75%.
• The rate cut was largely expected by the market, and Banxico is balancing dual challenges: bringing down inflation while also stimulating the economy amid tepid economic growth. Easing monetary policy could spur the economy but also fuel inflation in Latin America’s second-largest economy.
• In a statement on Thursday, the bank said it took into account "weak economic growth" and fluctuating global trade policies in its decision to lower borrowing costs. Still, the fact that Banxico reduced the interest rate by a quarter point instead of a half point – as it had four times earlier this year – underscores concern about sticky inflation, particularly the closely-watched core index.
• Annual core inflation, which is considered a good gauge of price trends because it strips out volatile food and energy prices, has been rising in recent months and hit 4.26% in the first half of September. Banxico targets inflation at 3%, plus or minus a percentage point. Headline inflation also accelerated in the first half of September, reaching 3.74%, up from 3.49% in the first half of August.
• In updated inflation forecasts released on Thursday, Banxico raised its estimate for year-end annual core inflation to 4.0% in the fourth quarter, up from its previous estimate of 3.7%. The bank said in its quarterly report in August that Mexico's economy - while anaemic - is showing resilience in the face of an uncertain business environment and global trade pressures. The bank strengthened its economic growth forecast for the year to 0.6%, up from a previous estimate of 0.1%. It is estimated that the economy will grow 1.1% in 2026.

(Source: Reuters)