Mexico's central bank holds interest rate at 6.5% amid inflation and external risks

Mexico's central bank, Banxico, has opted to keep its benchmark interest rate steady at 6.5%. This decision stems from a cautious approach, acknowledging the ongoing persistence of service inflation and a balance of risks that remains tilted upwards. The move comes despite a recent dip in prices and the Mexican economy's continued fragility.

In its minutes released Thursday, the bank's governing board stated it believes maintaining the reference rate at its current level is appropriate. They judged the monetary stance to be suitable for addressing macroeconomic challenges, including those influenced by the international landscape. The report, detailing the August 6 meeting, highlighted that the board considered the current monetary position adequate for managing economic risks.

Banxico justified its decision by evaluating "the observed exchange rate levels, the absence of demand pressures in the economy, and the degree of monetary restriction implemented." Most board members noted that general inflation had fallen to 3.10% in the first half of July, with core inflation dropping to 3.95%, returning within the target range. They attributed this decline partly to lower inflation in goods and a favorable contribution from services, including a reduction in tourist service inflation reflecting the transient nature of the World Cup.

Despite the economy expanding in the second quarter after a first-quarter contraction, some members expressed concern about persistent weakness in various demand components. The board also highlighted that, even with the GDP expansion, "the output gap remains in negative territory." Internationally, members pointed to Middle East tensions as a source of upward inflation risks, with some warning that the prolonged conflict has tested the buffers mitigating oil price increases. The central bank reiterated its commitment to its primary mandate and the need to persevere in efforts to consolidate low and stable inflation.