(Bloomberg) -- Mexico’s inflation slowed more than expected in January, supporting the central bank’s decision to deliver a half-point cut to its benchmark interest rate and signal additional reductions of the same magnitude.
Official data released Friday showed consumer prices rose 3.59% from the year prior, the least since January 2021 and below the 3.63% median estimate of economists surveyed by Bloomberg. Inflation was 4.21% in 2024.
Core inflation, which excludes volatile items like food and fuel and it’s closely watched by the central bank, slightly accelerated to 3.66%, less than the 3.69% estimated by analysts.
Banxico, as the central bank is known, delivered a half-point cut to its key interest rate Thursday, bringing it to 9.50%, as inflation and economic growth are slowing and tariffs on Mexico promised by US President Donald Trump have been delayed until March.
The bank said it will consider more reductions of the same size. “The Board estimates that looking forward it could continue calibrating the monetary policy stance and consider adjusting it in similar magnitudes,” policymakers wrote in a statement accompanying their decision.
Fruits and vegetables were the main driver of the better-than-expected January figure, falling 4.69% on the month. Beverages, tobacco and other food items rose 0.76% on the month, while energy prices picked up 0.93%. Overall, consumer prices rose 0.29% on the month with core inflation at 0.41%.
“The print probably was known by the central bank’s board, adding confidence to their signaling to continue cutting an accelerated pace,” said Marco Oviedo, senior strategist at XP Investimentos. He sees policymakers delivering half-point cuts in March and May, followed by additional quarter-point reductions until borrowing costs hit 7.5%.
“Interest rates are really high, given the economy is probably already in a recession and inflation is within the target range,” he added.
Banxico said that even if inflation expectations for the medium and long term remained relatively stable, the balance of risks for the trajectory of inflation continues tilted to the upside. “Announcements of possible changes in economic policy by the new US administration have added uncertainty to the projections.”
The inflationary environment, policymakers added, “will allow the rate cutting cycle to continue, albeit maintaining a restrictive stance.”
Analysts in the latest Citi survey published this week forecast inflation at 3.9% by the end of this year and at 3.7% by the end of 2026. Banxico targets inflation of 3%, plus or minus 1 percentage point.
Despite the “good” inflation report, risks to Mexico’s economy abound, warned Andres Abadia, chief Latin American economist at Pantheon Macroeconomics.
“Risks of the trade saga are lurking, and they could force the bank to keep a cautious stance,” he said. “Uncertainty can also prompt a fall in investment, which pressures activity to the downside and also eases inflation. So its a double-edged sword.”
--With assistance from Rafael Gayol.
(Updates with economists comments and more details from report throughout)
