Mexico’s inflationary environment is expected to allow policymakers to continue cutting the benchmark interest rate, according to the head of the Bank of Mexico. Banxico, as the Mexican central bank is known, reduced the key rate by 50 basis points to 9.50% on Thursday, doubling the 25-basis-point cuts it had made since it began lowering borrowing costs from a record high of 11.25% in March 2024.

“Our work is not over. The fight against inflation is now in a new phase,” Banxico Governor Victoria Rodriguez said in an interview late on Sunday.

Last week’s rate reduction brought Mexico’s interest rate to its lowest since September 2022, as annual inflation in Latin America’s second-biggest economy slowed to 3.69% in the first half of January. This is the lowest level for headline inflation since early 2021 and is within the bank’s target of 3%, plus or minus one percentage point.

“In order to face the challenges of this new phase, we need lower interest rates,” Rodriguez added.

Mexico’s peso currency and domestic stocks have experienced extended volatility amid the threat of U.S. tariffs on its exports, even though the restrictions were paused until March 1 following a pact between the two countries.

“We are confident that authorities of both countries will work to find greater cooperation and lasting solutions, although we, of course, remain attentive to what might be said in March,” said Rodriguez.

Some analysts have warned that the tariffs could push Mexico into recession and trigger “stagflation” – high inflation, stagnant growth, and elevated unemployment.

Banxico could act if needed to ensure the orderly functioning of Mexican financial markets, Rodriguez said, emphasizing the importance of trade ties for both nations.

“Trade integration has been an important driver of growth, as has Mexican participation in U.S. production chains, which has allowed U.S. consumers to access products at competitive prices,” Rodriguez concluded.

Source: (Reuters)