Mexico cuts interest rate for first time in three years

Mexico's central bank on Thursday reduced its benchmark interest rate for the first time in three years following a slowing of inflation in Latin America's second-largest economy.

The Bank of Mexico also gave an upbeat outlook for the economy, which it said was "expected to show greater dynamism" after a sluggish end to last year.

The key interest rate was reduced by 0.25 percentage points to 11.00 percent, the central bank, also known as Banxico, said in a statement.

Previously it had stood at a record high of 11.25 percent since last March, after which the Bank of Mexico paused following 15 consecutive interest rate increases aimed at cooling inflation.

The latest decision was split four-to-one, with a single member of the governing board voting for no change.

"The fact that the vote was split and that Banxico didn't commit to further rate cuts reinforces our view that monetary loosening will proceed only gradually," the London-based consulting firm Capital Economics said in a commentary.

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After a three-month rebound, the annual inflation rate has turned lower again, falling to 4.4 percent in February, official figures showed earlier this month.

"The disinflation process is expected to continue, in view of the monetary policy stance attained and the easing of the shocks generated by the pandemic and the war in Ukraine," the statement said.

At the same time, it said that remaining "challenges and risks" required monetary policy to "continue being managed prudently."

The central bank kept investors guessing about the outlook for monetary policy, saying that it would "thoroughly monitor inflationary pressures" and make decisions depending on progress in tackling price pressures.

It expects inflation to fall to near the official 3.0 percent target in the second quarter of 2025.

One development of note was that the central bank increased its inflation projection for this year slightly to 3.6 percent, from 3.5 percent previously, the Dutch bank Rabobank noted.

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"Our forecast for the end of year policy rate is unchanged at 9.50 percent as we are now assuming 25-basis-point cuts at every meeting," it said in a research note.

Mexico's economy cooled in the fourth quarter of 2023 as growth slowed to 2.5 percent year-on-year, official figures showed last month.

With its close economic links to the United States, Mexico aims to ride a wave of so-called near shoring by US companies like electric carmaker Tesla moving their production closer to home.

Source: AFP