Bank of Mexico cuts interest rate as trade war stokes recession fears

By Brendan O'Boyle

MEXICO CITY (Reuters) -The Bank of Mexico delivered a unanimous 50-basis-point interest rate cut to 9.00% on Thursday, highlighting progress on inflation but warning of heightened uncertainty relating to trade tensions and a weakening economy.

The move, which was expected by analysts polled by Reuters, brings Mexico's benchmark rate to its lowest level since September 2022. It was the second consecutive cut of half a percentage point after the bank's five-member governing board sped up its rate-cutting pace at its February meeting.

Cuts of the same size could be considered at future meetings, Banxico, as the Mexican central bank is known, said in a statement announcing its decision. Banxico highlighted that Mexico's disinflation progress is "well on track."

Mexico's inflation rate has fallen within the bank's target range of 3%, plus or minus a percentage point. Data released days before the policy meeting showed that headline inflation eased to 3.67% on an annual basis in the first half of March, down from 3.74% in the previous month.

Easing inflation comes amid mounting concerns of a possible recession in Latin America's no. 2 economy, which was battered last year by a drought and has been thrashed in recent weeks by Washington's on-again, off-again tariff threats and a related drop in investor confidence.

"The changes in economic policy by the new U.S. administration have added uncertainty to the forecasts," said Banxico, adding that the effects could possibly push inflation higher or lower.

Banxico's rate decision comes a day after U.S. President Donald Trump announced new tariffs on auto imports, posing a threat to Mexico's critical auto industry.

Earlier this week, JPMorgan said a recession in Mexico was "unavoidable" after data from Mexico's statistics agency showed the economy shrunk 0.2% in January.

Banxico said Mexico's economy "is expected to exhibit weakness once again in the first quarter of 2025."

A first-quarter contraction would mark a technical recession, after the economy shrunk in the fourth quarter - its first quarterly contraction since the pandemic.

Banxico does not have economic growth under its remit and has taken a more cautious approach to rate-cutting than its regional counterparts, but a cooling economy generally could give it more space to continue cutting borrowing costs.

(Reporting by Brendan O'Boyle; Editing by Anthony Esposito and Alistair Bell)