Mexico cuts rates by 25 basis points vs expectations of a split

The Mexico central bank lowered their benchmark interest rate to 10.75% from 11%.

The expectations were split between unchanged and a 25 basis point cut.

• Banco de México’s Governing Board lowered the target for the overnight interbank interest rate by 25 basis points to 10.75%, effective August 9, 2024.
• Economic activity remained heterogeneous across countries in Q2 2024.
• The US economy grew faster than other advanced economies; headline and core inflation continued decreasing in most advanced economies.
• Some central banks of advanced economies cut their reference rates; the Federal Reserve left its rate unchanged, and the Bank of Japan raised it.
• Global financial markets experienced volatility due to the Bank of Japan’s rate hike and lesser dynamism in the US labor market.
• Key global risks include geopolitical turmoil, prolonged inflationary pressures, financial market volatility, and challenges to financial stability.
• Mexican financial markets were affected by international volatility; the Mexican peso depreciated, and the yield curve for government bonds decreased.
• Mexico’s economic activity grew at a low rate in Q2 2024, continuing the weakness observed since the end of 2023.
• Annual headline inflation rose to 5.57% in July due to a significant increase in the non-core component; core inflation, which better reflects the inflation trend, was 4.05%.
• Expectations for headline inflation for the end of 2024 were revised upwards; expectations for core inflation decreased, remaining stable for longer terms above target.
• Forecasts for headline inflation were revised upwards for the short term; core inflation anticipated to be 3.7% annualized in Q3 2024.
• Headline inflation is expected to converge to the target in Q4 2025, subject to various risks.
• The Governing Board considered the behavior of inflation and its determinants, projecting the dissipation of non-core component effects on headline inflation over the next quarters.
• The Board decided by majority to lower the target interest rate, estimating that the outlook for inflation allows for reducing the level of monetary restriction.
• Looking ahead, the Board foresees discussing reference rate adjustments based on global shocks, economic activity weakness, and the monetary policy stance.
• The Board remains committed to achieving an orderly and sustained convergence of headline inflation to the 3% target.
• Victoria Rodríguez, Galia Borja, and Omar Mejía voted in favor of lowering the rate; Irene Espinosa and Jonathan Heath voted to maintain the target at 11.00%.

This article was written by Greg Michalowski at www.forexlive.com.