The Bank of Mexico lowered its benchmark interest rate by 25 basis points to 7.25% on Thursday, the lowest since May 2022, but adopted a more cautious stance regarding further cuts.

While the economy shows signs of weakness, core inflation remains persistently high.

Unlike recent meetings, the central bank provided guidance only for its next policy decision and highlighted ongoing risks from stubborn core inflation.

For the fourth straight rate decision, Deputy Governor Jonathan Heath was the sole dissenting vote on the five-member board, the bank said in a statement.

Heath has consistently urged caution on rate cuts, citing persistent core inflation that remains above the central bank’s 3% target, which allows a tolerance of plus or minus one percentage point, Reuters reports.

The latest official data indicated that both headline and core inflation eased in the first half of October. However, core inflation, which excludes volatile items, remained above the central bank’s target range at 4.24%.

Banxico, as the Bank of Mexico is known, has elevated the persistence of core inflation as a key upside risk, according to Capital Economics senior economist Liam Peach.

The bank's statement “was perhaps a bit more hawkish than expected,” Peach stated, going on to add 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.”

Whereas Alberto Ramos, Goldman Sachs’ chief Latin America economist, pointed out that the central bank offered forward guidance on easing only for its next meeting in December, without extending it beyond that. While the bank is keeping the possibility of future rate cuts open, it is “abstaining from providing any explicit signal,” he said.

Despite worries over persistent core inflation, the board pointed to the continued weakness in Mexico’s economy, highlighted by a GDP contraction in the third quarter, as a key factor in its decision.

Alfredo Coutiño, Latin America director at Moody’s, said the central bank’s majority appears to be “hoping that weak economic performance will help bring down headline inflation.”

He cautioned, however, that relying solely on headline inflation for rate decisions is risky due to its volatility.

Mexico’s national statistics agency is set to release full-month inflation data for October on Friday morning.

According to a Reuters survey of analysts, headline inflation is expected to decline by roughly 20 basis points, while core inflation is projected to remain mostly unchanged.