By Ana Isabel Martinez, Adriana Barrera and Aida Pelaez-Fernandez

MEXICO CITY (Reuters)

Mexico’s central bank lowered its benchmark interest rate in a divided vote to 10.75%, down from 11.00%. This decision was made despite expectations of rising prices.

Three board members voted for a 25 basis points decrease, while two favored keeping the rate unchanged. The bank noted that inflationary pressures in Latin America’s second-largest economy may lead to further rate discussions.

Banxico revised its year-end headline inflation forecast to 4.4%, up from 4.0%, but kept the core inflation expectation at 3.9%. Analysts found the simultaneous expectation of higher inflation with a rate cut perplexing, raising concerns about the central bank’s credibility.

July’s inflation rate increased to its highest level in over a year, complicating the bank’s balancing act between controlling inflation and promoting economic growth. Recent consumer price data indicated an annual headline inflation rise to 5.57%, compared to 4.98% in June.

Following the rate cut announcement, the Mexican peso regained some strength, trading at 19.0108 pesos per U.S. dollar, after a brief increase to 18.9110 pesos pre-announcement. The peso’s decline since May has been contributing to inflation, with the currency hitting a nearly two-year low earlier this month.

In March, Banxico initiated its first rate cut since mid-2021, citing slowing inflation as a potential signal for future reductions. The central bank’s action contradicted a recent Reuters poll where most analysts anticipated the rate to remain at 11%.