**BANXICO Cuts Benchmark Interest Rate to 10.75%**
On August 8, 2024, the Bank of Mexico (BANXICO) announced a reduction of its interbank interest rate by 25 basis points, bringing it down to 10.75%. This decision comes despite an annual inflation increase of 5.57% in July 2024, marking five consecutive months of rising inflation and reaching its highest level since May 2023, when it was recorded at 5.84%, according to the National Institute of Statistics and Geography (INEGI).
The decision was not unanimous among the members of the Board of Governors of the autonomous constitutional body; it passed with a narrow margin of three votes to two. Governor Victoria Rodríguez Ceja, along with Deputy Governors Galia Borja Gómez and Omar Mejía Castelazo, voted in favor of the reduction. Meanwhile, Deputy Governors Irene Espinosa Cantellano and Jonathan Ernest Heath Constable voted to maintain the interest rate at 11.00%.
BANXICO highlighted the varying economic dynamism across countries during the second quarter of 2024. The U.S. economy continued to expand at a pace greater than other advanced economies, where inflation, both general and core, continued to decrease. While some central banks in advanced economies reduced their reference rates, the Federal Reserve kept its rate unchanged, and the Bank of Japan increased its rate. These global shifts, alongside a slowdown in the U.S. labor market, contributed to the volatility observed in international financial markets.
BANXICO noted various global risks, including heightened geopolitical tensions, prolonged inflationary pressures, increased market volatility, and challenges to financial stability. Mexican financial markets felt the impact of this international volatility as the Mexican peso depreciated, and government bond yields declined, particularly in mid-term maturities.
Domestically, Mexico’s economic activity showed weak growth during the second quarter of 2024, indicating continued sluggishness since the end of the previous year. The general annual inflation rate rose to 5.57% in July, driven mainly by the more volatile non-core component. However, the core inflation, which better reflects long-term trends, has been decreasing for 18 consecutive months, reaching 4.05% in July 2024, down from a peak contribution of 6.32 percentage points in November 2022.
Given the supply shocks affecting non-core inflation, BANXICO adjusted its short-term general inflation forecasts upwards while expecting core inflation to be around 3.7% annually by the third quarter of 2024. The bank still anticipates that general inflation will converge to its 3% target by the fourth quarter of 2025, albeit with risks such as persistent core inflation, possible currency depreciation, cost pressures, and geopolitical conflicts.
Going forward, BANXICO will assess the impact of its monetary stance and gradually reduce monetary tightening, as long as the inflationary environment allows for such adjustments. The central bank reaffirmed its commitment to maintaining low and stable inflation in Mexico.
**Secondary Article**
**Global Economic Trends Impacting BANXICO’s Interest Rate Decision**
The recent decision by BANXICO to lower its interbank interest rate is part of a broader trend seen among various central banks worldwide. While some have opted to cut rates to stimulate their economies, others have maintained or increased their rates in response to different economic pressures.
### **Federal Reserve Holds Rates Steady Amid Mixed U.S. Economic Signals**
The Federal Reserve of the United States decided to hold its interest rates steady in light of mixed economic signals. Despite ongoing growth, the U.S. labor market has shown signs of cooling, prompting the Fed to adopt a cautious approach. This decision has contributed to volatility in financial markets globally, reflecting the interconnected nature of modern economies.
### **Bank of Japan Takes Contrarian Approach with Rate Increase**
Contrary to the actions of several other central banks, the Bank of Japan raised its interest rate. This move is part of Japan’s strategy to combat prolonged deflation and stimulate economic activity. However, this decision has added another layer of complexity to the international financial landscape, already marked by uncertainty and volatility.
### **European Central Bank Faces Divergent Economic Performances**
In Europe, the economic performance remains uneven, with some member countries experiencing robust growth while others face stagnation. The European Central Bank (ECB) has thus far maintained a cautious stance, balancing the need for monetary support against the risk of fueling further inflation. This cautious approach reflects the ECB’s broader mandate to ensure price stability across the Eurozone.
**Implications for Mexico**
These diverse approaches by major central banks illustrate the challenges faced by BANXICO and other monetary authorities worldwide. As global economic conditions remain uncertain, central banks must carefully consider their domestic contexts while being mindful of external influences. For BANXICO, the recent rate cut aims to support economic activity in Mexico while navigating the complexities of rising inflation and global economic volatility.
Stay tuned to TJGringo.com for the latest updates on economic policies and their impact on both the national and global stage.