Mexico cut rates last week. Inflation then rose to 3.75%

What happened

On Thursday 5 November the Bank of Mexico, known as Banxico, cut its policy rate by a quarter point to 6.25%. Most economists had expected no change: 30 of 36 institutions in Citi's survey forecast a hold. The board was split, with three members voting for the cut and two against.

Banxico called it a one-off and said it expects to keep the rate at 6.25% "for an extended period". At the same time it raised its inflation forecasts for the fourth quarter, to 3.7% for both headline and core inflation, from 3.5% and 3.6%. It still expects inflation to reach its 3% target, which allows a range of 2% to 4%, by the end of 2027.

Four days later, on 9 November, the statistics office INEGI reported that consumer prices rose 3.75% in the year to October, up from 3.45% in September and above the 3.65% economists polled by Reuters had expected. It was the third rise in a row. Core inflation, which leaves out the most volatile prices such as fresh food and energy, edged up to 3.80% from 3.75%.

Why cut when inflation is rising?

Central banks look at why prices are rising, not only at how fast. Much of October's jump came from electricity, up 18.5% in the month, because summer subsidies ended in 18 of the cities in the index. That is a one-off: unless it pushes up wages and other prices, it drops out of the annual rate after a year.

Banxico's majority argued that the economy has slack, meaning it is producing below its capacity, so there is no pressure from demand, and that the high rates of the past years are still doing their job. With inflation at 3.75%, a 6.25% rate is still about 2.5 points above inflation in real terms. The two dissenters, and many economists, worry that core inflation near 3.8% is still well above target. Our mechanic on inflation and rates explains how central banks weigh the two.

Why the peso matters

Investors often borrow in currencies with low rates and buy pesos to earn Mexico's higher rate, a carry trade. The gap with the US is what attracts them: with the Fed at 3.75–4% and markets expecting a rise in December, the cut narrowed it. The dollar briefly reached 18.96 pesos after the decision and closed around 18.75, a fall of about 1% for the peso. A weaker peso raises the cost of imports, which is the main risk Banxico itself flags. See how exchange rates move.

Where it sits in the chain

This is Link 1, inflation and policy rates, with a currency twist (Link 3): when a central bank cuts while others raise, the rate gap narrows and the currency can do part of the inflation work in reverse.

What to watch

• Mexican inflation for the first half of November, due later this month.
• The minutes of the 5 November meeting, published about two weeks after it, which will show the arguments of the two dissenters.
• The peso, especially if the Fed raises rates on 8–9 December.