Bank of Mexico flags more rate cuts due to progress on lowering inflation

By Anthony Esposito

MEXICO CITY (Reuters) – The Bank of Mexico will likely be able to continue cutting its benchmark interest rate due to the progress made on bringing inflation down, bank governor Victoria Rodriguez told Reuters in an interview.

Banxico, as Mexico’s central bank is known, lowered its key rate by 25 basis points to 10.25% on Thursday in a unanimous decision by its five-member governing board.

“Given the progress of disinflation, we believe that we can continue with the cuts to the reference rate and in the following meetings we will be assessing the inflationary outlook and making the corresponding decisions,” said Rodriguez late on Monday.

In October, core inflation, which excludes volatile energy and food prices, slowed to 3.80% in the 12 months through October, down from 3.91% in September. Annual headline inflation rate ticked up to 4.76% last month, from 4.58% in September.

Banxico targets headline inflation at 3%, plus or minus one percentage point.

“Depending on what we see with the inflationary outlook, there could even be larger cuts,” said Rodriguez, referring to the fact that all four interest rate reductions this year, including at the last three straight meetings, have been 25 basis points each.

Meanwhile, Mexico’s peso currency has weakened sharply over the past six months, as a series of post-Mexican election reforms shook investor confidence in the country’s legal system, and as Donald Trump’s U.S. election victory fuels uncertainty over the future of the critical bilateral trade relationship.

Still, in the aftermath of the U.S. election, operating conditions in the forex market have remained “relatively orderly,” said Rodriguez, adding that while Banxico has not needed to take any action, it was monitoring the situation and ready to act if necessary.

“If operating conditions require it, we could, if necessary, intervene,” Rodriguez said.

On Friday, Mexico’s finance ministry presented the government’s highly-anticipated 2025 budget, forecasting the budget deficit next year will come down to 3.9% of gross domestic product as economic growth increases and the government plans hefty spending cuts including to defense and security.

Market watchers were keeping a close eye on the budget as the government is under pressure to narrow the deficit which is expected to close this year at 5.9% of GDP, the highest since the 1980s.

“After the budget was announced last Friday, the financial markets maintained an orderly behavior, which is undoubtedly a positive sign,” Rodriguez said.