Introduction to Mexico’s Central Bank Decision
The central bank of Mexico, also known as Banxico, recently made a significant decision regarding interest rates. In a split vote, the bank chose to cut the policy rate by 25 basis points (bp) to 7.75%. This decision was met with mixed reactions from analysts, who are calling for caution due to rising core inflation projections.
The Decision and Its Implications
Four members of the bank’s board, including Governor Victoria Rodríguez, voted in favor of the rate cut, while one member, Jonathan Heath, voted to keep the rate at 8%. The decision was based on the slowing headline inflation rate, which decreased to 3.51% annually in July from 4.32% in June. However, core inflation remained relatively unchanged at 4.23%, which is above the bank’s target rate of 3%.
Analysts’ Reactions
Analysts are warning that the decision to cut the interest rate may be premature, given the rising core inflation forecast. Gabriela Siller, director of financial analysis at Banco Base, expressed concern that the core inflation forecast is increasing from the third quarter of 2025 to the first quarter of 2026. This, she argues, is inconsistent with the theory of inflation and may lead to rising headline inflation.
Inflation Expectations and Monetary Policy
James Salazar, deputy director of economic research at Banco Base, believes that monetary policy remains restrictive, considering inflation expectations. However, he acknowledges that the issue now is one of confidence. If inflation suddenly rises again, it may lead to doubts about the effectiveness of the central bank’s actions. Salazar warns that there is a risk that inflation could remain above 4% for an extended period, which would not be good news for the central bank.
Future Rate Cuts
Despite the concerns, Banxico has stated that it will consider additional rate cuts in the future, taking into account the effects of all factors determining inflation. CI Banco is forecasting another 25bp interest rate cut this year, which would bring the rate to 7.5% by the end of 2025 and 6.75% by the end of 2026.
Conclusion
The decision by Mexico’s central bank to cut the interest rate has sparked a debate among analysts, who are calling for caution due to rising core inflation projections. While the bank believes that there is still room to cut the rate, others argue that monetary policy is no longer very restrictive and that the focus should be on achieving the target inflation rate of 3%. As the bank considers future rate cuts, it will be important to monitor inflation expectations and the effects of its actions on the economy.
