Bank of Mexico Cuts Interest Rate Amid Inflation Concerns
Authors Take Center Stage By Ana Isabel Martinez, Adriana Barrera, and Aida Pelaez-Fernandez
Central Bank’s Bold Move MEXICO CITY – In a surprising turn of events, Mexico’s central bank decided to lower its benchmark interest rate to 10.75%. This change reflects a cut from the previous 11.00%. The bank’s announcement came with a warning that it expects inflation to trend higher than what they initially projected.
Divided Board Decision During the board meeting, three members voted in favor of a 25 basis point cut, while two wanted to keep the rate unchanged. This split clearly indicates some internal debate on the best approach to handle the country’s economic situation.
Inflation Expectations Rise The bank, often referred to as Banxico, mentioned they’re revising their year-end inflation forecast from 4.0% to 4.4%. Interestingly, their core inflation expectation remains unchanged at 3.9%, raising eyebrows among economic analysts.
Analyst Reactions The decision to cut rates while anticipating higher inflation has perplexed some experts. Banco Base’s director, Gabriela Siller, expressed her confusion, stating, “How can you cut interest rates when you expect inflation to rise?” She worries this move could tarnish the bank’s reputation.
Inflation Complications July saw an increase in inflation to its highest level in over a year, making the bank’s decision even trickier as it struggles to balance the fight against inflation while also trying to stimulate economic growth.
Consumer Price Spike Last month, consumer prices surged, pushing annual headline inflation to 5.57%, a significant rise from June’s 4.98%. This upward trend certainly isn’t what the central bank had hoped for.
Peso’s Reaction Following the announcement of the rate cut, the Mexican peso’s fortunes fluctuated. Initially, it strengthened to 18.9110 pesos against the U.S. dollar before dipping slightly to 19.0108 pesos. The peso’s decline since May is causing added pressure on inflation, as it recently hit a nearly two-year low.
Rate Cuts in Context Earlier this year, Banxico slashed rates for the first time since tightening them in mid-2021, citing slowing inflation as a potential pathway to future cuts. The current decision contrasts with analysts’ predictions that leaned toward maintaining rates at 11%.
