Bank of Mexico seen cutting key rate by 50 basis points next week

By Gabriel Burin and Noe Torres

(Reuters) -Mexico's central bank is expected to cut its key interest rate by half a percentage point again in its announcement next week, although it would moderate the pace of monetary tightening going forward amid rising inflation and weak economic growth.

According to a Reuters poll released on Friday, 21 of 26 economists expect the central bank to cut borrowing costs to 8%, from its current 8.5%, in what would be its fourth consecutive 50 basis point cut.

Three participants expect Banxico, as the central bank is known, to take a more gradual approach by reducing interest rates by just 25 basis points, while the remaining two believe it will keep rates unchanged, following the U.S. Federal Reserve's decision this week to hold its benchmark interest rate steady.

Banxico has said it is considering lowering the interbank rate again by 50 basis points in its June 26 announcement, extending a monetary readjustment cycle that began in 2024 after it raised its key interest rate to a record high of 11.25% as part of its efforts to tame inflation following the pandemic.

But in May, the consumer price index exceeded the bank's official target of 3% interest rate plus or minus one percentage point, raising some doubts about whether the bank will follow through with such a significant rate reduction.

Deputy Governor Jonathan Heath told Reuters last week that he believes 50 basis point cuts should be paused until the data can be evaluated further.

A further 50 basis point cut would take Banxico's rate to its lowest level in three years, which could provide some relief to the weakening Mexican economy. But the majority of participants polled by Reuters said they believed the central bank should be more cautious in its next moves.

Latin America's second-largest economy narrowly avoided a technical recession in the first quarter of the year, but still faces serious risks amid sluggish domestic activity and uncertainty related to U.S. tariff policies.

Following next week's decision, Banxico could opt for a 25 basis point cut in its next announcement in August, according to 15 participants, possibly followed by a similar cut in September. A majority of the participants said they believed the third quarter could end with an interest rate at 7.5%.

(Reporting by Gabriel Burin in Buenos Aires; Writing by Noe Torres and Emily Green in Mexico City; Editing by Rosalba O'Brien)