(Bloomberg) — Mexico reduced borrowing costs for a second straight meeting Thursday as inflation readings are easing faster than expected and the economy heads for a third year of slower growth.
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Banxico, as the central bank is known, cut its key interest rate by a quarter-point to 10.5%, matching the estimate of 24 of 30 economists surveyed by Bloomberg. Five of the analysts thought that policymakers would lower the rate by 50 basis points, while one predicted they would hold.
The five-member board led by Governor Victoria Rodriguez in early August had looked past a run-up in consumer prices to deliver a 25 basis-point cut. Since then, headline inflation has decelerated sharply while weakness in the industrial sector of the US, which is Mexico’s No.1 trade partner, has undercut the country’s exports and points to slowing growth ahead for Latin America’s second-biggest economy.
“The economic conditions warrant it, on the one hand, and inflation has already resumed a downward trend,” Jessica Roldan, the chief economist at Casa de Bolsa Finamex, said before the decision. “Upward price pressures are moderating. We’re in a phase of the economic cycle in which it make sense for the stance to not be so restrictive.”
Headline inflation slowed to 4.66% in the first two weeks of September, almost a full percentage point lower than the mid-July print, and the once-sticky core component has also decelerated, coming down to 3.95%. The bank targets inflation at 3%, plus or minus a percentage point.
As to Mexico’s economy, the data have been bumpy but the direction of travel appears clear, and the consensus call among analysts is that growth will decline for a third year in 2024 and likely yet again in 2025.
Banxico last month cut its 2024 GDP forecast to 1.5% from 2.4% just three months earlier, suggesting a loss of activity and demand that have helped sustain stubbornly high inflation readings.
Also likely bolstering the case for easing, the US Federal Reserve last week lowered its key rate for the first time in four years with a half-point reduction and left the door open to additional cuts. Banxico usually takes the actions of its US counterpart into account when setting policy.
“Monetary policy is too restrictive. If you compare the real interest rate in the past against the inflationary expectation for the next 12 months, it is the most restrictive we have registered,” Rodolfo Navarrete, head of analysis at Mexican brokerage Vector Casa de Bolsa, said before the decision.
President-elect Claudia Sheinbaum will take office Oct. 1, and many investors have lost confidence in the country’s Congress dominated by her Morena party after it pushed through legislation that would have judges, including those of the Supreme Court, elected by popular vote starting in 2025. The uncertainty about what more partisan judges could mean for Mexico’s business environment has led some economists to estimate there will be a sharp decline in foreign investment.
Lower borrowing costs could be a boon for Sheinbaum’s government as the Finance Ministry prepares its 2025 budget, for which it has pledged that it will bring the deficit down from this year’s rate of 5.9% to 3.5% or less.
–With assistance from Rafael Gayol.
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