Banxico Cuts for Third Meeting as Core Inflation Slows

(Bloomberg) -- Mexico delivered a third straight interest rate cut as a key measure of underlying inflation retreats and concerns mount over the slowdown in Latin America’s No. 2 economy.

Banxico, as the central bank is known, reduced borrowing costs by a quarter-point to 10.25% in a unanimous decision on Thursday. The move was forecast by 25 of 27 economists surveyed by Bloomberg. Two of them saw policymakers holding the rate at 10.5%.

“Looking ahead, the Board expects that the inflationary environment will allow further reference rate adjustments,” policymakers wrote in a statement accompanying their decision. “It will consider the prospects of global shocks continuing to fade and the effects of the weakness in economic activity.”

Two years of double-digit interest rates have cooled core inflation back to within Banxico’s target range even as headline prints have proven harder to tame. At the same time, policymakers are quite aware that their restrictive policy stance is imposing a significant drag on the economy, which will likely slow for a third year in 2024 and also in 2025.

“The key here is that Banxico continues to see core inflation below 4.0%, which we think is enough for Banxico to keep cutting,” said Carlos Capistran, chief economist for Canada and Mexico at Bank of America. “But upside risks to inflation will maintain those cuts at 25bp clips.”

October data published last week showed that the year-on-year core reading, which strips out volatile items such as energy and food and is closely watched by policymakers, decelerated for a 21st straight month to a four-year low of 3.8%.

At the same time, headline readings continued to chart a bumpy course, jumping up to up to 4.76% last month after two months of declines. The central bank, which targets inflation of 3%, plus or minus one percentage point, now sees it ending 2024 at 4.7% and back to target by year-end 2025.

The bank attributed its revision to short-term inflation projections to supply shocks, but anticipated that their effect would dissipate. It also predicted that domestic activity would show a lack of dynamism in 2025.

Banxico’s board members at their last meeting on Sept. 26, when they voted for a quarter-point cut to 10.5%, warned of uncertainty ahead, including volatility in the Mexican peso, but focused on the importance of an improved inflation picture.