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Bank of Mexico Cuts Interest Rate by 25 Basis Points: Inflation Persists Above 4%

December 19, 2024 (Investorideas.com Newswire) Investorideas.com, a go-to platform for big investing ideas releases market commentary from Quasar Elizundia, Expert Research Strategist at Pepperston.

"In a widely anticipated decision by the markets, the Bank of Mexico (Banxico) has reduced its benchmark interest rate by 25 basis points, setting it at 10.00%. This move, effective from December 20, 2024, marks the continuation of the monetary normalization cycle initiated earlier this year, accumulating a total cut of 125 basis points from the 11.25% registered at the start of 2024.

This decision comes amid a global economic backdrop characterized by relatively stable growth in the last quarter of the year and an ongoing disinflationary process, albeit with recent upticks in general inflation in some advanced economies. Banxico's decision aligns with the global trend of monetary policy recalibration, seeking a balance between inflation control and stimulating economic activity, which has shown signs of slowing in Mexico during 2024, contrasting with last year's dynamism.

A key factor influencing Banxico's decision is the observed progress in core inflation, which stood at 3.58% in November, its lowest level since the onset of the pandemic. However, this decline contrasts with the persistence of headline inflation above 4%, a challenge that Banxico acknowledges and continues to monitor closely. "Achieving inflation convergence to the 3% target remains the priority of the Bank of Mexico, and we will adjust monetary policy as necessary to meet this goal," the institution's statement read.

Banxico's decision also comes a day after the Federal Reserve (Fed) announced its own monetary policy decision. While both institutions reduced rates by 25 basis points, the Fed's "hawkish" tone, anticipating more persistent inflation in the U.S., generates uncertainty and could place pressure on the Mexican peso. A peso depreciation could complicate Mexico's inflation outlook by increasing import costs, potentially limiting the scope of Banxico's monetary normalization going forward.

In this context, Banxico's communication emphasizes its commitment to maintaining a restrictive and vigilant monetary stance, adapting to economic conditions and inflationary risks, both domestic and external. Among these risks, the institution highlights the persistence of core inflation, exchange rate volatility, potential increases in production costs, climatic factors, and global geopolitical tensions.

In summary, Banxico's decision to cut the interest rate reflects a delicate balance between inflation control and supporting economic activity in a complex global environment. The institution remains attentive to economic data trends and inflationary risks, reaffirming its commitment to price stability."

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