Bank of Mexico, slowing pace of cuts, brings key rate to lowest in three years

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Banxico cuts rate to 7.75%, lowest since mid-2022

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Deputy Governor Heath dissents, votes to hold rate at 8.0%

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Inflation mixed; core index above target at 4.23%

(Adds detail from statement in paragraph 8, context in paragraphs 9-10, inflation forecasts in paragraph 15, analyst comment in paragraphs 16-17)

By Brendan O'Boyle

MEXICO CITY, Aug 7 (Reuters) - The Bank of Mexico cut its benchmark interest rate by 25 basis points on Thursday in a divided vote, slowing its pace of monetary easing and bringing the rate to its lowest level in three years.

The decision by the bank's five-member governing board brings the rate to 7.75%, its lowest since mid-2022.

Deputy Governor Jonathan Heath was the sole dissenter, voting to hold the interest rate at 8.0%.

The move was largely expected by the market after the bank's governing board signaled at its last meeting in June that it would move to smaller reductions after four consecutive cuts of a half of a percentage point.

Banxico, as the Bank of Mexico is known, has been balancing dual challenges. It is seeking to bring down inflation while also stimulating the economy amid weak economic growth and uncertainty tied to trade tensions and geopolitical developments.

In a statement, the central bank said the board's decision "took into account the behavior of the exchange rate, the weakness of economic activity, and the possible impact of changes in trade policies worldwide."

While Thursday's statement noted the board would consider rate changes going forward, it left out more specific language that it had included in past announcements signaling future cuts.

Heath, who has now voted to hold the rate for two consecutive meetings, called for prudence around lowering the rate at Banxico's June meeting, calling it "unrealistic" to expect inflation to fall on its own just because of stagnant economic forecasts.

Mexico's economy grew just 0.7% in the second quarter, an improvement from 0.1% in the first quarter. Still, analysts polled by the central bank last month forecast 2025 growth of just 0.3%.

INFLATION MIXED BAG

Official data earlier on Thursday showed that Mexico's annual headline inflation slowed in July to 3.51%, its lowest level since late 2020.

However, the closely watched core index, which strips out certain volatile products, remained above the bank's official target at 4.23%.

Banxico targets inflation at 3%, plus or minus a percentage point.

In its statement on Thursday, the central bank lowered its forecast for the average annual headline inflation in the third quarter to 3.8% from 4.1% previously. At the same time, the bank raised its forecast for core inflation in the third quarter from 3.8% to 4.1%.

Gabriela Siller, head of analysis at Banco Base, said raising the core inflation forecast while leaving the headline forecast unchanged was "inconsistent with theory."

"It also implies acknowledging that the recent slowdown in inflation has been driven by volatile prices, which poses an upside risk to headline inflation," Siller wrote on X. (Reporting by Brendan O'Boyle; Editing by Emily Green and Sandra Maler)