Mexico: Banxico cuts rate for second time in a row in September
At its 26 September meeting, the Governing Board of the Bank of Mexico (Banxico) decided to cut the overnight interbank interest rate by 25 basis points to 7.75%, marking the second consecutive cut. In August, the Board lowered rates for the first time since June 2014 which ended a tightening cycle that had lasted since December 2015. The move was widely expected by market analysts; however, the decision was not unanimous as two of the five Board members voted for a 50-basis point reduction.
The Board’s decision came on the back of moderating inflation, weak domestic activity and policy easing globally. Inflation fell to 3.2% in August from 3.8% in July, thus moving closer to the Bank’s 3.0% target. For its part, core inflation has persistently remained around 3.8% in recent months, while inflation expectations hold relatively stable. Meanwhile, growth flatlined in the second quarter, and thus the economy only narrowly avoided slipping into technical recession. Although activity is expected to pick up slightly in the remained of the year, risks are still tilted to the downside amid persistent uncertainty. Lastly, a turn to more accommodative policy stances on the global stage—particularly from the Fed, which has cut rates twice since July—also drove the Board’s decision to cut.
In terms of forward guidance, the Bank remained cautious and acknowledged both upside and downside risks to inflation. A weakening of the currency due to domestic and external factors; stickiness in the recent trend seen in core inflation; further threats of the U.S. imposing tariffs on Mexican imports; increasing energy and agriculture prices; and wage increases could fuel price pressures. Meanwhile, an appreciation of the peso amid lower global interest rates, and wider-than-anticipated slack could pressure inflation downwards. Moreover, due to persistent global uncertainty and an overall slowdown in activity, the Bank reiterated that risks to growth prospects continue to be tilted to the downside. Accordingly, as stated in the previous June and July meetings, the Bank will maintain a prudent stance and policy will be adjusted in a timely and firm manner should risks materialize.
The next monetary policy meeting is scheduled for 14 November.