By Ana Isabel Martinez, Adriana Barrera and Aida Pelaez-Fernandez
MEXICO CITY (Reuters) -Mexico’s central bank lowered its benchmark interest rate in a divided vote to 10.75%, the monetary authority said on Thursday, cutting the key borrowing rate from 11.00% but also signaling that it expects prices to rise higher than previously expected.
Three members of the bank’s board voted to lower the rate by 25 basis points, while two others sought to hold it steady, according to a statement announcing the decision.
In its statement, the bank noted it expects inflationary pressures in Latin America’s No. 2 economy to allow for further discussion of rate adjustments going forward.
Banxico, as the central bank is known, upwardly revised its forecast for year-end headline inflation to 4.4%, from 4.0% previously, while maintaining its expectation for core inflation at 3.9%.
The expectation for higher inflation while lowering borrowing costs struck some analysts as incongruous.
“It doesn’t make sense that they expect higher inflation and cut the interest rate,” said Banco Base director Gabriela Siller, adding that the decision could “diminish” the central bank’s reputation.
The uptick in July’s inflation rate, to its highest level in over a year, was seen further complicating the bank’s rates decision, as it balances combating inflation with the need to boost economic growth.
Consumer price data for last month showed that annual headline inflation rose to 5.57%, surpassing June’s rate of 4.98%.
Immediately after the rate cut was announced, Mexico’s peso pared gains, up 1.3% for the day to trade at 19.0108 pesos per U.S. dollar, after the currency had strengthened to 18.9110 pesos against the greenback moments before the bank’s rate decision was released.
The peso’s slump since May is seen fueling inflation, and earlier this month the currency weakened to a nearly two-year low.
In March, Banxico cut rates for the first time since it began its restrictive cycle in mid-2021. At the time, the bank noted that slowing inflation could pave the way for future cuts.
The decision by Banxico, as the central bank is known, to cut rates contradicted a Reuters poll from earlier this week, in which a narrow majority of analysts surveyed expected the bank to hold the rate at 11%.