The split decision by the board of Mexico’s central bank (Banxico) to cut the policy rate by 25bp to 7.75% on Thursday was met with calls for caution by analysts, given that projections for core inflation rose.
Governor Victoria Rodríguez, along with Galia Borja, Omar Mejía and José Gabriel Cuadra, voted to cut the rate while Jonathan Heath voted to keep it at 8%.
Although headline inflation slowed more than expected in July to 3.51% annually, from 4.32% in June, analysts focused on core inflation, which stood at 4.23%, virtually unchanged from the previous month. Banxico has an inflation target of 3%, plus or minus one point.
And while the central bank’s board lowered its inflation forecast for the third quarter, from 4.1% to 3.8%, Gabriela Siller, director of financial analysis at Banco Base, posted on her X account that “it is very striking that the core inflation forecast is rising from 3Q25 to 1Q26” compared to the previous forecast, although Banxico sees the rate falling over the period.
“Raising the underlying inflation forecast and leaving the headline inflation is inconsistent with theory. Furthermore, it implies recognizing that the slowdown in inflation has been driven by non-volatile prices, which represents a risk of rising headline inflation,” said Siller, who had advocated for the rate to remain at 8%.
This year, Banxico has made four 50bp cuts and one 25bp cut, bringing the policy rate down from 10%. Therefore, Siller said “monetary policy is no longer very restrictive in Mexico.”
However, James Salazar, deputy director of economic research at Banco Base, said monetary policy remains restrictive, considering inflation expectations, and this is what has led the central bank to believe it still has room to cut the rate. However, in his opinion, the issue now is one of confidence.
“The problem is always the trust you place in the market, because if inflation suddenly rises again and remains far from the target for a longer period of time then certain doubts begin to arise about the effectiveness of these types of actions by the central bank,” Salazar told BNamericas.
“There is a risk that inflation could remain above 4% for a while, for one or two years. So, that is not good news for the central bank because its goal is to achieve 3% inflation.”
In a statement, Banxico stated that “going forward, the board of governors will consider additional cuts to the reference rate” and “will take into account the effects of all factors determining inflation.”
CI Banco forecasts there could be another 25bp interest rate cut this year, closing 2025 at 7.5% and 2026 at 6.75%.