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Volatility stops Mexico's central bank from cutting interest rate
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Mexico's central bank (Banxico) decided to keep the reference interest rate at 11%, as expected by most analysts, due to persistent high inflation and recent volatility in the markets and in the exchange rate after the June 2 elections.
“Banxico maintained its policy rate at 11% for the second time, the expected outcome in light of market volatility following the election results. The vote was split four to one,” Carlos Morales, director of Fitch Ratings, said in a note after the announcement by the Banxico's governing board.
The monetary authority has maintained its key rate at 11% since March, when it trimmed it by 25 basis points from a recent high of 11.25%.
In the decision, Banxico raised its general inflation outlook for the second and third quarters to 4.7% and 4.5%, respectively. It also pointed to possible greater depreciation of the peso as one of the upside risks for inflation.
However, the central bank continues expecting general inflation to decline towards the target of 3% in the fourth quarter of 2025.
“Although the depreciation of the national currency has an upward influence on the inflation forecast, its effects are partly offset by those corresponding to the greater weakness of economic activity,” it said.
So far in June, in the wake of the elections, the peso has declined 8.2% against the dollar, according to data from Investing.com. For the year so far, it has dipped 8.4%.
Fitch director Morales said that inflation had a slight upturn after its consistent decline last year, reaching 4.7% in May, rising from 4.4% in February, the lowest point so far this year, but he noted the positive that core inflation continues to shrink constantly, reaching 4.2%.
“We forecast inflation will resume its decline, given the relatively restrictive monetary policy stance. We recently revised our policy rate forecast and now anticipate only modest further cuts to 10.5% in the later part of the year, with cuts occurring relatively cautiously thereafter,” he added.
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