By Brendan O’Boyle and Aida Pelaez-Fernandez
MEXICO CITY, April 9 (Reuters) – A rift within Mexico’s central bank over the future of interest rates was thrown into sharp relief on Thursday, as new data revealed inflation jumped to a year-and-a-half high in March.
Minutes from the bank’s March 26 meeting, published on Thursday, show a board deeply divided on its recent decision to cut rates, pitting fears of resurgent inflation and Middle East conflict against the needs of a sluggish economy.
The debate takes on new urgency with the economic data released on Thursday. The figures from national statistics agency INEGI show consumer prices rose 4.59% in the year through March, accelerating from 4.02% the previous month to its highest level since October 2024.
The numbers are the first monthly inflation data published since Mexico’s central bank, also known as Banxico, resumed its rate easing cycle last month, with a contentious 3-2 vote to lower its benchmark interest rate by 25 basis points to 6.75%.
The minutes, published shortly after the inflation data, detail the divisions behind the decision. Governor Victoria Rodriguez and deputies Omar Mejia and Gabriel Cuadra voted in favor of the cut, while deputies Jonathan Heath and Galia Borja dissented.
Borja and Heath argued for a more cautious approach, citing the fresh uncertainty posed by geopolitical tensions and disruptions from the U.S. and Israel’s war on Iran.
“The escalation of the Middle East conflict has raised oil prices and volatility in financial markets, introducing new risks for inflation and economic activity,” deputy Galia Borja said. “There is still limited information to accurately assess the implications of this shock.”
Heath, the most hawkish on the board, advocated for a pause and warned that easing while inflation persists undermines the bank’s credibility. “With these actions, we are giving the wrong impression of being less committed to the primary mandate,” he said.
Conversely, the board’s majority argued that Mexico’s sluggish economy provides a buffer against those pressures. The minutes noted that “most members estimated that the current ample slack conditions of the Mexican economy would help mitigate the impact” of shocks from the conflict.
EYES ON BANXICO’S NEXT MOVE
March’s inflationary uptick was tied to higher prices for basic goods – such as fruits and vegetables – and transport services, as global fuel costs surged due to the U.S.-Israeli war on Iran.
That could help shape the board’s opinions when it meets May 7 for its next monetary policy decision. The bank’s dovish majority sees rising agricultural prices as driven by temporary supply factors, Thursday’s minutes showed, rather than being driven by underlying elements of Mexico’s economy, which could necesitate a tighter monetary policy.
In a sign that underlying pressures may indeed be easing, the annual core index decelerated to 4.45% from a prior 4.50% registered in February. Policymakers see the core index as a better gauge of inflation’s trajectory precisely because it strips out volatile food and energy prices.
Still, the bank’s minority called for more time to assess price pressures before cutting rates again, and analysts expect a pause is likely at next month’s meeting.
Pantheon Macroeconomics’ chief Latin America economist Andres Abadia said in a note on Thursday that he believes Banxico is likely to delay further rate cuts until inflationary pressures show clear signs of cooling.
“The ceasefire will ease some pressure on energy markets, helping to stabilize gasoline prices and inflation expectations,” he said.
(Reporting by Brendan O’Boyle, Aida Pelaez-Fernandez and Natalia Siniawski; Editing by Emily Green and Alistair Bell)
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