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Investing.com -- The Banco de México (Banxico) has decided to lower its target for the overnight interbank interest rate by 50 basis points, bringing it down from 10.00% to 9.50%. This decision became effective on February 7, 2025. The bank’s governing board also indicated that it is considering an additional rate cut of the same magnitude.
The decision to cut rates comes amid a backdrop of global economic activity that grew at a slightly slower pace in the fourth quarter of 2024 than the rate recorded throughout the year. Despite this, the resilience of the US economy remained notable. Additionally, disinflation continued to progress worldwide in 2024, and the US Federal Reserve left its reference rate unchanged.
The board noted increased global risks due to escalating trade tensions, potential policies that could reverse global economic integration, intensifying geopolitical turmoil, prolonged inflationary pressures, and higher levels of volatility in financial markets. These factors contributed to an environment of high uncertainty, leading to increased government interest rates and an appreciation of the US dollar.
In response to these developments, the United States announced tariffs on imports from China, Mexico, and Canada, but agreed to pause the implementation for the latter two countries. The Mexican peso experienced a significant depreciation following the tariff announcement, which was later reversed once the tariff pause was negotiated.
The Mexican economy weakened in the fourth quarter of 2024, registering a contraction. The labor market also slowed down, with the balance of risks to economic growth leaning to the downside.
Inflation in Mexico decreased to 3.69% in the first half of January 2025, a level not seen since the start of 2021. Core inflation reached 3.72% during the same period, close to its average level between 2003 and 2019. Inflation expectations for the medium and long term remained relatively stable at levels above the target.
The Banxico board anticipates that the inflationary environment will permit further rate cuts, while still maintaining a restrictive stance. They will take into account the effects of the country’s weak economic activity and the impact of both the current and future restrictive monetary policy stance on the evolution of inflation throughout the horizon in which monetary policy operates.
The decision to lower the target for the overnight interbank interest rate by 50 basis points to 9.50% was supported by Victoria Rodríguez, Galia Borja, José Gabriel Cuadra, and Omar Mejía. Jonathan Heath voted in favor of a smaller reduction of 25 basis points, which would have brought the rate down to 9.75%.
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