Bank of Mexico to consider further cuts to benchmark rate

By Sarah Morland and Emily Green

MEXICO CITY, Aug 21 (Reuters) - The Bank of Mexico indicated it would consider additional cuts to its benchmark rate, with a majority of members arguing that a sluggish economy and cooling labor market suggest inflation will continue to decline, according to minutes of the central bank's meeting released on Thursday.

"Going forward, the governing board will consider additional cuts to the benchmark rate," the central bank said in a report of the minutes of its decision.

The minutes reflect the rationale that went into Banxico's August 7 decision to cut its interest rate by 25 basis points to 7.75%, its lowest level since mid-2022.

The decision split the five-member board, with Deputy Governor Jonathan Heath voting to hold the benchmark rate because of concerns over sticky inflation.

Heath argued that inflation's persistence has been underestimated and said the bank should adopt a more cautious stance. He previously has said that slow economic growth does not necessarily mean core inflation will decline.

Headline inflation slowed to 3.51% in July, its lowest level since late 2020.

Core inflation, which is considered a more reliable indicator as it strips out volatile prices, also fell very slightly in July to 4.23%, although it remained above the central bank's target range of 3% plus or minus one percentage point.

A majority of board members said they expect inflation to continue declining, pointing to labor market weakness and a stronger Mexico peso relative to the second half of 2024.

The board said in deciding to reduce the interest rate earlier this month it "took into account the behavior of the exchange rate, the weakness of economic activity, and the possible impact of changes in trade policies worldwide."

Banxico is facing a dual challenge as it seeks to keep inflation down while also spurring economic growth through lower interest rates. Mexico's President Claudia Sheinbaum has expressed support for Banxico's interest rate cuts.

Most Banxico board members noted that wage growth had moderated and the pace of people entering formal employment had slowed.

The central bank is also managing risks caused by volatile trade policies in the U.S., Mexico's top trade partner.

Private sector analysts polled in July by Banxico expect the economy to grow just slightly this year, at 0.3%.