Mexico’s Central Bank Expected to Cut Interest Rate

MEXICO CITY (Reuters) – Mexico’s central bank is likely to reduce its benchmark interest rate by 50 basis points later this week, according to a Reuters poll conducted on Wednesday. This cut would bring the rate down to 9.50% as inflation declines and the economy experienced a slight contraction late last year.

Economists’ Predictions

Out of 17 economists surveyed, 14 expect a 50-basis-point cut, while three predict a 25-basis-point reduction. The last benchmark rate was set at 10.00% in December after a unanimous vote by the central bank’s policymaking board.

Inflation Trends

Annual inflation in Mexico, the second-largest economy in Latin America, has slowed to its lowest level in almost four years as of the first half of January. The 12-month headline inflation rate stood at 3.69%, the lowest since early 2021, aligning with the central bank’s target of 3%, plus or minus one percentage point. This drop followed a peak above 8% in 2022.

Economic Contraction

Additional support for a rate cut comes from economic data indicating a 0.6% contraction in Mexico’s economy during the fourth quarter, marking its first quarter-on-quarter contraction in over three years.

Interest Rate Comparisons

Should the central bank implement a 50-basis-point cut, Mexico’s interest rate would be at its lowest level since September 2022, narrowing the disparity in borrowing costs between Mexico and the U.S. The U.S. Federal Reserve recently maintained its interest rate in the 4.25%-4.50% range and indicated a cautious approach to future cuts pending inflation and job data.

Upcoming Decision

The Bank of Mexico, referred to locally as Banxico, will announce its interest rate decision at 1 p.m. local time (1900 GMT) on Thursday, marking its initial monetary policy decision of the year.