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(Bloomberg) — Mexico’s prolonged slide in core inflation and a recent economic slowdown were among factors that supported the central bank’s decision to cut rates in last week’s split vote, Bank of Mexico Deputy Governor Omar Mejia said in an interview.

The decision by Banxico, as the bank is known, to cut its benchmark rate by a quarter-point to 10.75% even as inflation accelerated in July has come in for no small degree of scrutiny over the past week. 

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The board was divided, with Governor Victoria Rodriguez and Mejia and Galia Borja voting in favor of a cut, and Irene Espinosa and Jonathan Heath voting to hold rates. 

Non-core inflation was the main component that led July inflation to increase to 5.57% from a year earlier, said Mejia, pointing to the continued drop in the core reading as a more relevant data point due to its larger weight in overall prices. A slower-than-expected economy will also have a downward impact on price formation, he added. 

“Given these elements, a cut with a degree of restriction wasn’t just adequate, but opportune and efficient,” Mejia said in his first interview with a foreign media outlet. “To consider just one data point on the margin would mean renouncing a fair amount of information that, as central bankers, we must incorporate into our decisions.”

Core inflation, which is closely watched by the central bank, slowed to 4.05% in July from 4.13% the previous month. The central bank targets inflation at 3%, plus or minus one percentage point. 

Mejia also pointed to the ex-ante rate falling less than the nominal rate due to adjustments in inflation expectations. He had voted for a 25 basis-point cut for two meetings in a row — in June, as the board’s lone dissenter. 

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Mejia is the board’s most recent appointee, beginning his tenure in January 2023. He had been an adviser to the five-member board since 2019. Previously, he served as deputy treasurer for the federal government and ran Mexico City’s financial administration office.

Upward Revision

Mejia highlighted that, although Banxico made an upward revision to its forecast for headline inflation for the end of 2024 and the first quarter of 2025, the bank still sees inflation converging to its target by the second half of next year, as monetary policy remains tight. 

“Adjustments to the degree of restriction cannot be classified as premature, complacent or inconsistent,” he said. 

Mejia said the inflation panorama “as a whole” should be evaluated at the next meeting in September, and that he could not get ahead of himself to say what his position will be.

The slowdown in the Mexican economy could continue, he added, influenced by the weakness in manufacturing in both Mexico and the US, which could lead to slower inflation. That’s why from the June board meeting, he thought a rate cut was appropriate. 

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“I’m observing a loss of dynamism” in activity, he said. “I believe we are going to continue to grow this year and next, but we are going to grow at a slower pace than expected.”

The most recent bout of volatility in the Mexican peso was explained by external factors, such as fears of a US slowdown and the Bank of Japan’s rate increase, and an unwinding in carry trades. Still, the bank is seeing “an improvement in the operating conditions of the Mexican currency,” he said. 

Divided Board

On Wednesday, Heath said in an interview with local newspaper El Universal that the cut was “premature” amid lack of clarity of when prices of fruits, vegetables, cooking gas and other energy products that caused the July inflation spike will decrease. 

Mejia, on the other hand, said that shocks on prices of fruits and vegetables “are typically short-lived and the impact they could have on core inflation are practically nil.”

When asked about whether the split board impacts credibility, Mejia said the bank’s credibility is “guaranteed.”

“Amid complex conditions for the panorama currently, it’s normal that there be divergence amid opinions,” Mejia said.

Minutes from the last board meeting will be released Aug. 22. 

—With assistance from Maya Averbuch.

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