UPDATE 1-Middle East concerns dominated Banxico rate meeting, minutes show

Uncertainty around the impacts ​of the war in Iran dominated ‌the ​Bank of Mexico's May split decision to cut the country's interest rate, although the bank's majority ultimately saw risks from the conflict as ‌mixed, according to minutes from the meeting published Thursday. The central bank, known as Banxico, lowered its benchmark interest rate on May 7 by 25 basis points to 6.50% and announced an end to its easing ‌cycle that began in early 2024. The bank's five members all highlighted the upward risks ‌to inflation related to the conflict, although most "argued that their direct impact on inflation in Mexico has been limited," according to the minutes.

In fact, the war could also cause inflation to fall, some of the bank's governors said, given the possibility ⁠of ​weaker global economic activity stemming ⁠from the conflict. Mexico's weak economy was also top of mind for the board members, as most said the economy's ⁠0.8% contraction in the first quarter was "notably greater than anticipated." Year-over-year growth, meanwhile, is nearly flat, despite President Claudia Sheinbaum's ​efforts to boost investment and domestic production. The majority of board members emphasized that slack conditions in ⁠the economy - meaning many workers and businesses are operating below full capacity - are expected to reduce inflationary pressures. The central bank's 3-2 ⁠rate ​decision on May 7 followed data showing Mexico's headline inflation cooled slightly to 4.45% in April, though it remains well above Banxico's 3% target. The board does not expect to reach its ⁠target until the second quarter of 2027. Mexico's statistics agency will publish inflation data on Friday for the ⁠first half of May. ⁠According to a Reuters poll, annual headline inflation is expected to have eased further, reaching an estimated 4.13%, although the core rate is seen ticking up ‌to 4.26% - ‌both forecasts well above Banxico's target.

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