By Brendan O’Boyle
MEXICO CITY, May 7 (Reuters) – The Bank of Mexico cut its benchmark interest rate in a split decision on Thursday and said it was ending an over two-year-long easing cycle as it balances concerns over above-target inflation with pressure to revive Mexico’s slowing economy.
The 25 basis point cut brings the rate to 6.50%, its lowest since May 2022.
The 3-2 decision by the central bank’s five‑member board had been largely expected, bolstered by data released earlier on Thursday showing headline inflation slowed in April for the first time since December.
Bank of Mexico Governor Victoria Rodriguez, along with deputy governors Omar Mejia and Gabriel Cuadra, voted in favor of the 25‑basis‑point cut. Deputies Jonathan Heath and Galia Borja voted to keep the rate unchanged.
Notably, the bank estimated the April rate cut will bring to a conclusion the rate cutting cycle that begin in March 2024.
“Looking ahead, the governing board estimates that it will be appropriate to maintain the reference rate at its current level,” the bank said.
Thursday’s split vote highlights concerns among the bank’s governors about economic weakness in Latin America’s second-largest economy, complicated by diverging opinions about inflation trends.
Mexico’s economy shrunk 0.8% in the first quarter, according to preliminary data, primarily due to falling activity in the manufacturing and agricultural sectors. Year-over-year growth, meanwhile, was nearly flat, despite President Claudia Sheinbaum’s efforts to boost investment and domestic production.
LINGERING INFLATION CONCERNS
New data earlier on Thursday showed that price pressures eased in April. Mexico’s headline inflation rate slowed to 4.45% in April while the closely watched core inflation rate – which strips out some volatile food and energy prices – eased to 4.26%.
But inflation still remains well above Banxico’s 3% target, and the board does not see it returning to target until the second quarter of next year.
As it has in the past, the board on Thursday raised its headline inflation forecasts, this time by a tenth of a percentage point for the second and third quarters of this year.
Borja and Heath have said at past meetings that the board needs more time to evaluate the impact of recent shocks on inflation.
“It was a mistake to cut the interest rate,” Gabriela Siller, Banco Base’s economic analysis director, wrote on X, shortly after the bank announced its decision. “It sends a misguided signal to the market regarding the fight against inflation and makes the peso more vulnerable.”
While the bank said on Thursday that the board sees current monetary policy as “well-suited” to deal with challenges stemming from the broader economic environment, it acknowledged that the risks pushing inflation higher outweigh factors that could ease price pressures.
The U.S.-Israel war with Iran has driven up gas prices and shipping costs, and fluctuating U.S. economic policy have added to concerns about inflation.
Still, a majority of Banxico members have prioritized addressing the country’s weak economic growth, with the bank’s dovish majority arguing that recent pressure on prices was largely temporary.
The bank’s decision in March to push through a 25 basis point cut caught many analysts by surprise and put it somewhat at odds with recent moves by central banks in major developed markets, who adopted a more cautious approach in light of the war in the Middle East.
Ahead of the bank’s decision on Thursday, Sheinbaum said Banxico had made bank the right decision to cut rates in March, citing the new economic data showing inflation had fallen in April from previous months.
“Look at the good decision they made last time: They lowered the interest rate again, and inflation is already coming down. In other words, they are not necessarily incompatible,” Sheinbaum said.
(Reporting by Brendan O’Boyle; Additional reporting by Noe Torres; Editing by Emily Green)
Comments