(Bloomberg) -- Mexico’s central bank cut its benchmark interest rate for the first time since March and said it would consider additional reductions as policymakers look past the recent inflation spike to focus on threats to economic growth.

Banxico, as the bank is known, on Thursday reduced its key rate by a quarter-point to 10.75% in a split decision. The move was forecast by 15 of 29 economists surveyed by Bloomberg. Fourteen analysts expected the bank to keep it at 11%.

“Looking ahead, the board foresees that the inflationary environment may allow for discussing reference rate adjustments,” policymakers wrote in a statement accompanying their decision. “It will consider that global shocks will continue fading and the effects of the weakness in economic activity.”

Policymakers led by Governor Victoria Rodriguez had kept interest rates unchanged at their last two meetings amid elevated consumer prices, pushed higher in no small part by a jump in food costs. Banxico’s board has also considered risks associated with slowing growth in Mexico, recent global market volatility, and recession jitters in the US, which is Mexico’s No. 1 trading partner.

Although the central bank highlighted the 18 consecutive months of reductions in core inflation, it revised upward its forecast for headline inflation in the last quarter of 2024 to 4.4% from 4% previously, and also for the first quarter of 2025 to 3.7% from 3.5%.

Banxico also said the balance of risks for the trajectory of inflation within the forecast horizon remains biased to the upside, but expects shock effects on headline inflation to dissipate over the next quarters.

“It is noteworthy that Banxico cuts despite the fact that they are raising inflation expectations for the end of this year and the first quarter of next year, which means that there are important risks,” said Gabriela Siller, head of economic research at Grupo Financiero Base.

Board members Irene Espinosa and Jonathan Heath voted to keep rates at 11%.

Banxico’s decision and its forward guidance “reinforces our view that inflation will not converge to the target in Mexico anytime soon, and reinforces our strategists’ recommendation to buy inflation,” said Carlos Capistran, chief economist for Canada and Mexico at Bank of America Securities.

The cut did little to dent sharp rally in the Mexican peso, which was trading 1.6% stronger Thursday.

“Market concerns about Mexico are not about inflation this time, they are about growth and the possibility of making it harder for the new administration to be able to implement fiscal consolidation,” Gabriel Casillas, managing director at Barclays Capital Inc., said before the decision.

Some analysts are now predicting there may be a continuous cutting cycle through the end of the year.

A government report posted earlier Thursday showed that consumer prices rose 5.57% in July from a year earlier, higher than the 5.53% median estimate of economists surveyed by Bloomberg, and up from 4.98% in June. Core inflation slowed to 4.05% from 4.13% in June, compared with the median estimate of 4.02%.

Non-core perishable food and energy — rising 23.6% and 9.2% respectively — pushed the headline reading to a more than one-year high and it has now accelerated every month since the end of February.

Headwinds

Helping to put growth on Banxico’s radar screen, a government report last week showed that quarter-on-quarter output in Mexico surprised to the downside in the second quarter, buttressing expectations that Latin America’s second-biggest economy will slow for a third year in 2024 as global headwinds proliferate.

Gross domestic product expanded 0.2% in the second quarter, matching the lowest forecast in a Bloomberg survey of economists. From a year earlier, GDP grew 2.2%, less than the 2.4% median estimate, according to preliminary data from the statistics institute.

Banxico said the balance of risks to growth of economic activity remains biased to the downside.

Analysts in a Citi survey published this week had pushed back their call for Banxico’s next move by a month, forecasting a quarter-point cut in September.

They also raised their 2024 year-end inflation forecast to 4.60% from 4.40% previously, and to 3.90% for year-end 2025 from 3.85%.

Given the “dovish profile” of the three Banxico appointees of Mexican President Andres Manuel Lopez Obrador, “and given that the US Fed will likely start cutting in September, it’s likely that they will cut again in the next meeting unless the MXN depreciates a lot or core inflation re-accelerates,” said Benito Berber, chief Latin America economist at Natixis.

--With assistance from Carolina Gonzalez and Rafael Gayol.

(Updates with comments from Banxico’s board members in fifth, sixth, 16th paragraphs, adds analyst comments from seventh paragraph)