Dec 18 (Reuters) - The Bank of Mexico lowered its benchmark interest rate by 25 basis points on Thursday, signaling confidence that inflation is still on track to return to target by late next year despite
an increase in near-term inflation risks.
The reduction, which was widely expected by analysts, brings the rate to 7.00%, its lowest level since April 2022.
The decision by the central bank's five-member governing board was divided, the bank said in a statement. Deputy Governor Jonathan Heath voted to hold the rate at its previous level for the fifth consecutive rate decision.
The bank's forward guidance shifted modestly in Thursday's announcement, with the board set to "evaluate the timing for additional reference rate adjustments."
The guidance "is a signal that a pause is likely at the next meeting and the next moves in rates will be data-dependent," said Capital Economics' Liam Peach.
Thursday's rate cut comes after Mexican inflation accelerated in November, landing slightly above market expectations. Annual headline inflation sped up to 3.80% in November from 3.57% the month prior. The closely watched core index, which strips out volatile items like energy and food prices, rose from 4.28% to 4.43% in November.
The board on Thursday also raised its own inflation projections for the fourth quarter of 2025 and the first two quarters of 2026, crediting the revision mostly to services inflation easing more slowly than expected.
Still, Banxico, as the central bank is known, projects headline inflation will return to the bank's 3% target by the third quarter of 2026.
Sticky core inflation has loomed over Banxico's rate-cutting cycle.
Heath has criticized his colleagues' optimism, saying Banxico's forecasts faced a "credibility crisis" given what he said is the implausibility of reaching the 3% inflation goal in just a few months' time.
A Reuters poll published ahead of Thursday's rate cut showed analysts were divided over whether Banxico will pursue another reduction early next year. Half the respondents said they expect one or two more cuts by the end of March, with the rest forecasting a pause in the long-easing cycle.
Pantheon Macroeconomics' chief Latin America economist Andres Abadia said he expects rate cuts will be paused in early 2026, "resuming only if core inflation moderates sustainably and the Mexican peso remains stable."
Banxico on Thursday warned that economic activity is expected to remain weak in the fourth quarter, which the board cited as a downside inflationary risk and said factored into its decision to cut the rate.
(Reporting by Brendan O'Boyle; Additional reporting by Noe Torres; Editing by Emily Green and Aurora Ellis)
