Mexico's central bank (Banxico) on Thursday held its target interest rate at 6.5pc, its lowest level in more than four years, and signaled support for keeping rates unchanged even while noting that the balance of inflation risks remained to the upside on war risks and US economic policy.
The unanimous decision to hold rates unchanged was the third since Banxico cut rates to 6.5pc on 7 May. The bank reduced the benchmark rate 450 basis points over 18 half- and quarter- point rate cuts made from a cyclical high of 11.25pc in March 2024.
Banxico, after the decision, said the balance of risks to inflation remains biased to the upside, and raised the conflict in the Middle East, adding, "economic policy by the US administration and a possible extension of geopolitical conflicts continue adding uncertainty to the forecasts."
The bank added slack conditions are "expected to continue throughout the forecast horizon and downward risks to economic activity persist."
The announced included a statement responding to the Federal Reserve's recent quarter-point rate hike on its benchmark to 3.75-4pc and market expectations another hike may be coming, stating, "Since macroeconomic conditions in Mexico are different from those in the United States, monetary policy should not have to react mechanically to the anticipated adjustments to the federal funds rate."
The central bank made one noteworthy change in Thursday's rate announcement, changing the wording to say the board will "make its decisions considering the ongoing disinflation process and the expected behavior of its determinants" in place of "the governing board believes it will be appropriate to maintain the reference rate at its current level."
Noting the shift in language, Juan Sebastián Restrepo of Mexican asset manager Skandia said, "While the scope for further cuts has narrowed in the current context, the statement does not suggest that Banxico is preparing for a rate-hiking cycle"
Banxico noted headline inflation sped to 3.42pc in mid-September from 3.1pc mid-July, with stability in core inflation, which excludes volatile food and energy prices.
The announcement also cited the potential for climate-related impacts with US weather agency NOAA latest forecast giving a 75pc probability that the El Nino climate event, peaking between October and December, would become the most intense since 1950.
