Banxico cuts at third meeting as core inflation slows

(Bloomberg) — Mexico cut rates for a third straight time as a key gauge of underlying inflation declines and concerns are growing about the slowdown in Latin America’s second-largest economy.

Banxico, as the central bank is known, cut financing costs by a quarter of a percentage point to 10.25% in a unanimous decision on Thursday. This move was predicted by 25 of 27 economists surveyed by Bloomberg. Two of them saw policymakers keeping interest rates at 10.5%.

“Looking ahead, the Council expects that the inflation environment will allow further adjustments to the benchmark interest rate,” policymakers wrote in a statement accompanying their decision. “The prospects for continued easing of global shocks and the impact of weakness in economic activity will be taken into account.”

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

“Banxico appears to be paying more attention to core inflation than to headlines,” and “is more focused on supporting economic activity than on getting inflation back to target,” said Brendan McKenna, an emerging markets economist and currency strategist at Wells Fargo, before the decision.

October data released last week shows the year-on-year core value, which excludes volatile items like energy and food and is closely watched by policymakers, has slowed to a record low for the 21st month in a row in four years of 3.8%.

At the same time, headlines continued to follow a bumpy course, rising to 4.76% last month after two months of declines. The central bank, which targets inflation of 3%, plus or minus one percentage point, expects inflation to end at 4.3% and back in 2024, with that target at the end of 2025.

Banxico’s board members warned of the uncertainty ahead, including Mexican peso volatility, but focused on the importance of an improved inflation picture.

Policymakers pointed to the continued slowdown in the core component and the improvement in services inflation – a bugbear for central banks worldwide – and that food and non-food benchmarks were both at eight-year lows.

Moreover, the recent economic slowdown in Mexico and cooling inflation and economic activity in the US, Mexico’s largest trading partner, would allow Banxico to continue easing policies, according to the minutes of the meeting.

A month earlier, after the August meeting, Banxico had lowered its GDP forecast for 2024 from 2.4% to 1.5%, and from 1.5% to 1.2% for 2025, suggesting that is from a loss of activity that has maintained persistently high inflation rates.

Mexico’s economic growth could face additional headwinds if newly-elected US President Donald Trump makes good on his threat to impose hefty, far-reaching tariffs on products Mexico exports to the US and deport millions of migrants back across the border.

–With help from Rafael Gayol.

(Updates with unanimous decision in second paragraph, adds comments from board members in third paragraph.)