The Bank of Mexico cut its policy rate from 6.50% to 6.25%. The rate cut was described as a one-off adjustment; the peso plunged immediately after the announcement but subsequently pared its losses.
The Bank of Mexico cut its policy rate from 6.50% to 6.25% at its monetary policy meeting last week. It was the first rate cut in 4 meetings since May, making it an unexpected move for the market as it was inconsistent with the May announcement that had declared the end of the cycle.
The statement characterized the rate cut as a "one-off adjustment" and indicated that the bank intended to keep rates at the current level for an extended period. This emphasized that the cut had been implemented as an adjustment to monetary tightening.
The peso came under selling pressure immediately after the announcement, but after the initial decline, it pared its losses. The central bank said that, given the easing in supply-demand conditions, the price impact of peso depreciation was limited, and did not signal strong concern about inflation at this stage.
Going forward, carry trades may be unwound depending on the outlook for US rate hikes and movements in interest-rate differentials, potentially triggering a renewed move toward a weaker peso and stronger dollar. The impact will depend on US interest-rate developments, and attention is focused on future announcements and any additional policy measures.