Bank of Mexico Holds Steady at 11%, Future Cuts Possible

The Bank of Mexico kept its benchmark interest rate at 11.00%, signaling potential future cuts due to easing inflation. The decision aligned with analyst expectations amidst post-election market volatility. Despite concerns about the peso's depreciation, the bank maintained confidence in its inflation forecasts, expecting a return to the target range by next year.

The Bank of Mexico held its benchmark interest rate steady at 11.00% on Thursday but signaled easing inflation could pave the way for future cuts. The decision to hold the rate where it has remained since a 25 basis-point rate cut in March, was expected by most analysts polled by Reuters after post-election market volatility this month.

Four bank board members, including Governor Victoria Rodriguez, voted for keeping the rate unchanged. Deputy Governor Omar Mejia voted to lower the rate by 25 basis points to 10.75%. In a statement, Banxico, as Mexico's central bank is known, said it expected disinflation to continue and that "looking ahead, the board foresees that the inflationary environment may allow for discussing reference-rate adjustments."

Mexico's peso has fallen sharply since the June 2 general election, sparking concerns about its potential impact on inflation. Banxico addressed those concerns saying that "although the depreciation of the Mexican peso impacts the inflation forecast upwards, its effects are partly offset by those associated with the greater weakness exhibited by economic activity."

In early May, Banxico also left the rate unchanged as persistent inflation in Latin America's second-largest economy remained above the bank's target range of 3%, plus or minus one percentage point. Consumer prices in Mexico increased during the first half of June, pushing the annual headline figure up to 4.78%, slightly above the 4.69% reported at the end of May.

Banxico held its forecast for average headline inflation in the fourth quarter at 4.0%, the same as its forecast in May. It revised its forecast for average core inflation in the fourth quarter slightly upward to 3.9%, from 3.8%. Banxico kept its forecast that headline inflation will converge to its target in the final quarter next year.

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