Bank of Mexico poised for 50 basis points rate cut despite inflation rebound
MEXICO CITY (Reuters) -Mexico’s central bank is expected to cut its key interest rate by another half percentage point this month despite a recent surge in inflation, although analysts believe the pace of rate cuts could slow if prices remain under control.
In May, inflation exceeded the central bank’s target of 3%, plus or minus a percentage point, after the headline rate accelerated to 4.42%, its highest level since November. Core inflation, meanwhile, rose to 4.06%, its highest level in almost a year.
However, a dozen economists surveyed by Reuters still expect the Bank of Mexico to implement its fourth consecutive rate cut of 50 basis points at its next meeting on June 26.
"I see it as very unlikely that they will change their plans for a 50 bp cut, unless there’s a major surprise," said Julio Ruiz, chief economist for Mexico at Citi.
"I think they still believe that the level of monetary restriction is too high compared to the current inflation rate."
Gabriela Siller, head of analysis at Banco Base, also expects another half-percentage-point cut this month, but believes the most "recommended" course of action would be for the central bank to pause its monetary easing cycle, which began in early 2024 after rates reached a record high of 11.25%.
"Given the surge in inflation and its potential impact on long-term expectations, it would be best for the Bank of Mexico to either cut rates by only 25 bp or pause its rate-cutting cycle," she said.
Another 50 bps cut would bring interest rates down to 8%, their lowest level in three years, providing a boost to the struggling economy.
However, going forward, experts believe the rise in inflation should lead the central bank to be more cautious in its future moves.
"What we should expect at least is a moderation in the bank’s statement," said Ramse Gutierrez, co-director of investments at Franklin Templeton. "It would be reasonable to expect the Bank of Mexico to be more cautious in its future rate cuts."
Although the bank’s governing board has stated it will maintain a restrictive monetary stance, it has also said it plans to continue cutting rates, with a potential half-percentage-point cut on the table in June, depending on consumer price behavior.
Last month, the central bank’s governor, Victoria Rodriguez, said in an interview that the effects of economic weakness would be taken into account when calibrating monetary policy.
Mexico’s economy, Latin America’s second largest, narrowly avoided a technical recession in the first quarter, but still faces significant risks due to weak domestic activity and uncertainty surrounding U.S. trade policies.
The central bank in late May slashed its 2025 growth forecast for gross domestic product to just 0.1% from a previous estimate of 0.6%, which would be its worst performance since the pandemic.
"We expect growth to remain the main driver of monetary policy, and we still believe that the Bank of Mexico has room to ease monetary policy," Barclays said.
