BdeM makes first rate cut in 3 years

BdeM makes first rate cut in 3 years

The Bank of Mexico (BdeM) announced a reduction in its reference interest rate to 11 percent, the first decrease in three years. This rate determines the cost of financing for families and companies in the credit market. The central bank cautioned that this reduction does not signify the start of a downward trend in income, as challenges remain for controlling inflation.

The reference rate is a key tool used by the central bank to manage inflation. When the rate is increased, credit becomes more expensive, which helps to curb rising prices and slow down economic activity. In a statement, the BdeM acknowledged a decrease in inflation levels following the pandemic, but emphasized the need for continued prudent monetary policy management due to ongoing challenges and risks.

The monetary stance remains strict after this cut, with the aim of achieving an inflation rate of 3 percent. Currently, annual inflation stands at 4.4 percent. The BdeM began increasing the interest rate in February 2021 to combat post-pandemic inflation, reaching its peak in March 2023. Since then, there have been no further changes.

Regarding future inflation expectations, the BdeM noted a reduction in general inflation projections for 2024, while underlying inflation expectations remained steady. Despite the anticipated inflationary pressures, risks such as persistent underlying inflation, exchange rate fluctuations, increased cost pressures, and geopolitical tensions continue to pose challenges.

Analysts predict that the central bank will make decisions based on available information, with a focus on maintaining flexibility while keeping inflation in check. Speculations suggest a potential rate cut in the second quarter, with the rate potentially reaching 10 percent by the end of the year. The monetary authorities are advised to proceed cautiously, making gradual adjustments to the funding rate to maintain monetary restriction and sustain the downward trend in inflation.

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