Bank of Mexico lowers key rate to 9.5%, accelerates pace of cuts

Adds details from monetary policy statement and context throughout

By Brendan O'Boyle

MEXICO CITY, Feb 6 (Reuters) - The Bank of Mexico lowered its benchmark interest rate by 50 basis points on Thursday, saying it could cut by a similar magnitude in the future as inflation cools and after the economy contracted slightly late last year.

The cut, expected by analysts polled by Reuters, was double the 25-basis-point reductions the central bank has implemented since it began lowering borrowing costs from a record high of 11.25% in March 2024.

The decision by the central bank's five-member governing board was not unanimous. Deputy Governor Jonathan Heath cast the sole vote to lower the rate by 25 basis points.

New member Jose Gabriel Cuadra, whom Mexico's senate confirmed unanimously on Wednesday as Deputy Governor Irene Espinosa's replacement, voted with the majority.

Thursday's move brings Mexico's interest rate to its lowest since September 2022 and narrows the gap in borrowing costs between Mexico and the United States. The U.S. Federal Reserve in late January left its policy rate unchanged in a 4.25%-4.50% range.

In a statement announcing the decision, the Mexican monetary authority said that the inflation environment would allow continued cuts, with cuts of "similar magnitudes" possible.

Annual inflation in Latin America's second-biggest economy slowed to 3.69% in the first half of January, its lowest level since early 2021 and within the bank's target of 3%, plus or minus one percentage point.

Full-month inflation data for January will be published on Friday and is expected to show the annual headline rate falling to its lowest level in four years .

Prospects for a rate cut were boosted by data showing Mexico's economy contracted by 0.6% in the fourth quarter, its first quarter-on-quarter contraction in more than three years.

Mexico's central bank has taken a more cautious approach to bringing rates down among regional peers, some of which, like Brazil , have returned to raising rates amid stubborn inflation.