Bank of Mexico cuts interest rate, tone turns more cautious

By Brendan O'Boyle

MEXICO CITY, Nov 6 (Reuters) -

The Bank of Mexico cut its benchmark rate by 25 basis points on Thursday but struck a more cautious tone on the outlook for further easing, as the economy shows weakness but core inflation remains sticky.

The rate's reduction to 7.25%, its lowest level since May 2022, was widely expected, though the central bank in a change from recent meetings offered guidance only for its next meeting, while also emphasizing lingering risks from stubborn core inflation.

For the fourth consecutive rate decision, Deputy Governor Jonathan Heath was the only person on the five-member board to vote against the reduction, the bank said in a statement.

Heath has repeatedly called for caution around rate cuts, pointing to stubborn core inflation that exceeds the central bank's 3% target, which has a tolerance range of plus or minus a percentage point.

The most recent official data showed that headline inflation, as well as the closely watched core index, declined in the first half of October, though core inflation, which strips out volatile products, remained outside of the bank's target range at 4.24%.

Banxico, as the bank is known, moved the persistence of core inflation higher in its list of upside inflation risks, noted Capital Economics senior economist Liam Peach.

Peach said the bank's statement "was perhaps a bit more hawkish than expected," adding that its change in guidance "suggests a bit more caution with further interest rate cuts, which may now become more data dependent and stop-start."

Alberto Ramos, chief Latin America economist at Goldman Sachs, also noted that the bank only gave easing forward guidance for its next meeting, in December, but not after that. The bank is leaving the door open to future cuts but "abstaining from providing any explicit signal," he said.

Despite concerns about core inflation, the bank's board cited the ongoing weakness in Mexico's economy -

GDP contracted in the third quarter

- as factoring into its decision.

For Alfredo Couti?o, Latin America director at Moody's, the bank's majority is "hoping that weak economic performance will help bring down headline inflation."

Couti?o warned that headline inflation alone is too volatile to base rate decisions on.

Mexico's national statistics agency will report inflation data for the full month of October on Friday morning. A Reuters poll of analysts forecasts headline inflation to fall by about 20 basis points, with core inflation expected to remain largely unchanged. (Reporting by Brendan O'Boyle; Additional reporting by Natalia Siniawski; Editing by Emily Green and Diane Craft)