MNI WATCH: Banxico To Keep Cutting Rates, Consensus Elusive

The Central Bank of Mexico will continue to assess the need for interest rate cuts at upcoming meetings after it decided Thursday to decelerate the pace of easing and reduce the overnight interbank interest rate by 25 basis points to 7.75%, following  four consecutive 50-basis-point reductions.

It remains unclear whether there will be room to continue cutting without pauses in the second half of the year as the interest rate approaches its neutral level. (See MNI EM INTERVIEW: Banxico Mulling More Gradual Policy - Mejia) 

Deputy Governor Jonathan Heath dissented again, voting to hold the rate at 8.00%. The second consecutive split decision highlights the difficulty of building consensus amid external uncertainty and persistent core inflation.

Banxico said the decision took into account the behavior of the exchange rate, the weakness of economic activity, and the potential impact of changes in global trade policies.

INFLATION CONCERN

Mexico's INPC annual inflation stood at 3.51% in July, in line with the 3.53% consensus forecast and down from 4.32% in June. The data was released just hours before the monetary policy decision.

Core inflation was 4.23%, in line with expectations and nearly unchanged from 4.24% a month earlier, reflecting some resilience. Meanwhile, headline inflation has returned to within the 3% target range — which allows for a 1 percentage point variation in either direction — supporting the case for continued rate cuts.

On the dovish side, the statement highlighted economic weakness and noted that, although the balance of risks for the inflation outlook remains tilted to the upside, it is less pronounced than during the 2021–2024 period.

"The changes in economic policy by the new U.S. administration have added uncertainty to the forecasts. Their effects could imply inflationary pressures on both sides of the balance," the statement said.

The board also noted that core inflation forecasts were revised slightly upward in the short term, while headline inflation is still expected to converge to the 3% target by the third quarter of 2026.