Bank of Mexico Holds Key Rate at 11%; Peso Barely Reacts
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Loading... - Asher Freeman
- 01 Jul 2024
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The Bank of Mexico (Banxico) decided to keep its key interest rate steady at 11% on Thursday, while hinting that the current "inflationary environment" might pave the way for rate cuts in the near future.
In the latest monetary policy meeting, four out of five Banxico board members, including Governor Victoria Rodríguez, voted to maintain the benchmark rate. Omar Mejía, the newest board member, favored a 25-basis-point cut. This marks the second consecutive meeting where the board chose to hold the rate at 11%, following a 25-basis-point reduction from a record high of 11.25% in March.
The decision followed the release of data from the national statistics agency INEGI on Monday, showing that the annual headline inflation rate rose to 4.78% in the first half of June, up from 4.69% in May, which is significantly above Banxico’s 3% target. Although headline inflation has been climbing since March, the annual core rate, closely monitored by the central bank, has been trending downward.
In a statement on Thursday, Banxico explained that its governing board "assessed the behavior of inflation and its determinants, as well as of inflation expectations" before voting to keep the key interest rate unchanged. The central bank noted that the recent depreciation of the Mexican peso "impacts the inflation forecast upwards," but these effects are partially counterbalanced by the weaker economic activity.
Banxico projected that headline inflation is "still expected to converge to the target in the fourth quarter of 2025," but acknowledged potential risks, including "greater foreign exchange depreciation" and "the intensification of geopolitical conflicts." The board emphasized that the "challenges and risks on both sides of the balance" necessitate a continuation of prudent monetary policy.
Looking forward, Banxico indicated that the inflationary environment might permit discussions on adjusting the reference rate. However, it stressed that any actions would ensure the reference rate remains aligned with the necessary trajectory to achieve a "sustained convergence of headline inflation to the 3% target during the forecast period."
Despite the decision, the Mexican peso showed little reaction, reflecting the market's anticipation of the bank's cautious approach.
