The decline in the annual domestic inflation rate fuels speculation that Banco de Mexico will continue cutting its benchmark interest rate, potentially deeper cuts than in recent decisions.

Last month, the central bank implemented a 25-basis-point cut to its benchmark interest rate, marking its fifth reduction in 2024, bringing the rate down to 10.00 per cent. The bank says that based on the progress on disinflation, larger downward adjustments could be considered in future meetings.

In an interview with Reuters, deputy governor Jonathan Heath explains the bank’s governing board might discuss a cut of up to 50 basis points in its first decision of 2025, scheduled for February 6.

Mexico’s headline inflation rate eased more than expected last month. Annual headline inflation in Latin America’s second-largest economy hit 4.21 per cent in December, data from the National Institute of Statistics and Geography (INEGI) showed—below the 4.28 per cent expected by economists in a Reuters poll and down from the November figure of 4.55 per cent.

The closely watched core consumer price index, which excludes volatile energy and food prices, accelerated to 3.65 per cent in the 12 months through December from 3.58 per cent the previous month. Economists expected it to come in at 3.62 per cent.

Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, reported that the uptick in core inflation appears temporary and pointed to a drop in non-core inflation, helped by falling food prices due to favourable weather, as a key factor driving the headline decline.