Banxico Cuts for Third Meeting as Core Inflation Slows

Mexico delivered a third straight interest rate cut as a key measure of underlying inflation retreats and concerns mount over the slowdown in Latin America’s No. 2 economy.

Author of the article:

Bloomberg News

Alex Vasquez

Published Nov 14, 2024  •  2 minute read

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(Bloomberg) — Mexico delivered a third straight interest rate cut as a key measure of underlying inflation retreats and concerns mount over the slowdown in Latin America’s No. 2 economy.

Banxico, as the central bank is known, reduced borrowing costs by a quarter-point to 10.25% in a unanimous decision on Thursday. The move was forecast by 25 of 27 economists surveyed by Bloomberg. Two of them saw policymakers holding the rate at 10.5%.

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“Looking ahead, the Board expects that the inflationary environment will allow further reference rate adjustments,” policymakers wrote in a statement accompanying their decision. “It will consider the prospects of global shocks continuing to fade and the effects of the weakness in economic activity.”

Two years of double-digit interest rates have cooled core inflation back to within Banxico’s target range even as headline prints have proven harder to tame. At the same time, policymakers are quite aware that their restrictive policy stance is imposing a significant drag on the economy, which will likely slow for a third year in 2024 and also in 2025.

“Banxico seems more attentive to core inflation rather than headline” readings, and “is more focused on supporting economic activity than bringing inflation back to target,” said Brendan McKenna, an emerging markets economist and FX strategist at Wells Fargo, before the decision. 

October data published last week showed that the year-on-year core reading, which strips out volatile items such as energy and food and is closely watched by policymakers, decelerated for a 21st straight month to a four-year low of 3.8%.

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At the same time, headline readings continued to chart a bumpy course, jumping up to up to 4.76% last month after two months of declines. The central bank, which targets inflation of 3%, plus or minus one percentage point, sees it ending 2024 at 4.3% and back and to target by year-end 2025.

Banxico’s board members at their last meeting on Sept. 26, when they voted for a quarter-point cut to 10.5%, warned of uncertainty ahead, including volatility in the Mexican peso, but focused on the importance of an improved inflation picture. 

Policymakers noted the sustained slowing of the core component and improvement in services inflation — a bugbear for central banks worldwide — and that food merchandise and non-food merchandise metrics were both running at eight-year lows.

Additionally, Mexico’s recent economic slowdown, as well as cooling inflation and economic activity in the US, Mexico’s No. 1 trading partner, would allow Banxico to continue easing policy, according to the minutes of the meeting. 

A month earlier following its August meeting, Banxico had cut its 2024 GDP forecast to 1.5% from 2.4%, and to 1.2% from 1.5% for 2025, suggesting a loss of activity that’s helped sustain stubbornly high inflation readings. 

Mexico’s economic growth could face additional headwinds if US President-elect Donald Trump makes good on his threat to slap hefty, sweeping tariffs on products that Mexico exports to the US and deport millions of migrants back across the border. 

—With assistance from Rafael Gayol.

(Updates with unanimous decision in second paragraph, adds comment from board members in third paragraph.)

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