MNI WATCH: Banxico Signals Slower Pace, Drops 'Restrictive'

The Central Bank of Mexico signaled Thursday it may slow the pace of rate cuts at its next meeting, after delivering the seventh consecutive interest rate cut and the fourth straight 50-basis-point reduction to 8.00%. 

Deputy Governor Jonathan Heath dissented in favor of keeping rates on hold.

On the other hand, Banxico removed from the statement the reference to rates needing to be restrictive, indicating that it may be targeting a neutral level by the end of the cycle. (See MNI WATCH: Banxico To Ease 50BP Again To 8.00%, Likely Split)

In May, the board said the inflationary environment would "allow to continue the rate cutting cycle, albeit maintaining a restrictive stance." This paragraph has now been shortened, stating only that actions will be implemented in a way that keeps rates consistent with the path needed "to enable an orderly and sustained convergence of headline inflation to the 3% target during the forecast period."

DECELERATING THE PACE

The clearest signal of a potential slowdown in the pace of cuts is that the board indicated more easing ahead without mentioning the size of future moves.

"Looking ahead, the Board will assess further adjustments to the reference rate. It will take into account the effects of all determinants of inflation," the English version of the statement said.

The previous decision, which lowered rates by 50 basis points to 8.50%, stated that the board would "consider adjusting it in similar magnitudes."

Progress in bringing inflation closer to the 3% target has been the main driver behind the Bank of Mexico’s decision to ease aggressively, despite a recent rebound in inflation that fueled expectations of a split decision — which ultimately materialized.

"The Governing Board deemed appropriate to continue calibrating the monetary policy stance. This decision was made considering the behavior of the exchange rate, the weakness of economic activity, and the possible impact of changes in trade policies worldwide,” Banxico said.

WEAK ACTIVITY

The weakness in economic activity was also cited as justification. "The Mexican economy expanded moderately in April. Nevertheless, economic slack prevails due to the weakness that the economy has been exhibiting. The environment of uncertainty and trade tensions poses significant downward risks," the statement noted. "The Mexican peso continued appreciating," it added.

On the hawkish side, the statement highlighted that headline inflation rose from 3.93% in April to 4.51% between April and the first half of June.

"Core inflation increased from 3.93 to 4.20% during the same period. Headline inflation expectations for the end of 2025 were revised upwards, while those for longer terms remained relatively stable at levels above target," it said.

Inflation forecasts were adjusted upwards, the board added. "Services inflation has declined more gradually and merchandise inflation has increased more than expected. Headline inflation is still expected to converge to the target in the third quarter of 2026."