Bank of Mexico cuts rate to 6.5% but signals end of easing cycle

Mexico’s central bank lowered its benchmark interest rate to 6.5% in a split decision, but signaled the end of its current easing cycle, providing hawkish forward guidance after a widely expected cut.

The board “deemed appropriate to make an additional reference rate cut and thereby conclude the cycle that began in March 2024,” the central bank said in a statement. Looking ahead, the board “estimates that it will be appropriate to maintain the reference rate at its current level.”

The 3-2 vote to reduce the overnight interest-rate target by a quarter of a percentage point followed reports showing inflation eased to 4.45% in April from 4.59% in March. The decision was also supported by a larger-than-expected economic contraction in the first quarter. Two members of the five-person board, Deputy governors Galia Borja and Jonathan Heath, voted to hold the rate at 6.75%.

By declaring the easing cycle over, the Bank of Mexico has established a firmly hawkish stance for the remainder of the year, prioritizing inflation control over further economic stimulus. This provides a degree of certainty for markets, though the split vote suggests internal division on the path forward as the bank still expects inflation to reach its 3% target in the second quarter of 2027.

Inflation and Growth Headwinds

The central bank's decision came after government data showed a challenging economic backdrop. Inflation, while easing, remains well above the bank's 3% target. Core inflation, which strips out volatile food and energy prices, also slowed to 4.26% in April from 4.45% a month prior.

At the same time, the economy contracted more than anticipated in the first quarter, with declines across industrial production, services, and agriculture. The bank noted that significant downside risks to economic growth remain, creating a difficult balancing act between supporting the economy and taming price pressures. In its statement, the bank slightly raised its inflation forecasts for the second and third quarters of this year, while leaving its core inflation forecasts unchanged.

Split Decision Reveals Dissent

The dissent from two of the five board members highlights a division within Banxico on the appropriate path for monetary policy. The votes by Deputy Governors Galia Borja and Jonathan Heath to maintain the rate at 6.75% suggest a preference for a more cautious approach, potentially prioritizing a faster return to the inflation target over providing immediate economic relief.

This split decision, combined with the definitive end to the easing cycle, sends a complex signal to investors. While the path for rates in the immediate future is now clear, the internal disagreement could lead to market uncertainty regarding the bank's reaction function to future economic data, particularly if inflation proves more persistent or the economic slowdown deepens.

This article is for informational purposes only and does not constitute investment advice.