FILE PHOTO: The logo of Mexico's Central Bank (Banco de Mexico) is seen at its building in downtown Mexico City, Mexico, April 26, 2024. REUTERS/Henry Romero/File Photo

By Emily Green and Sarah Morland

MEXICO CITY (Reuters) -Mexico's economy is performing better than expected, the Bank of Mexico said on Friday in its quarterly report, while increasing its growth forecast for the rest of the year for Latin America's second largest economy.

The report offered a positive, if mixed, assessment: Mexico's economy is showing resilience in the face of an uncertain business environment and on-again, off-again tariffs from the U.S., Mexico's largest trade partner.

But Banxico, as Mexico's central bank is known, said economic growth remains sluggish and it projected higher rates of inflation for the rest of the year compared with its previous estimate.

It said the economic effects of U.S. tariffs may take more time to become clear.

"The Mexican economy has performed better than the external environment would suggest and could continue performing better than anticipated as long as the adverse effects of change in U.S. economy policy take time to materialize," the bank's quarterly report said.

Banxico raised its forecast for economic growth this year to 0.6% from its previous estimate of 0.1%. The central bank also increased its outlook for economic growth in 2026 to 1.1% from a prior estimate of 0.9%.

"The Mexican economy grew more than expected," Central Bank Governor Victoria Rodriguez said during a presentation of the report.

But the bank also highlighted an increase in the price of goods. It now expects annual headline inflation in the fourth quarter to reach 3.7%, versus a prior forecast of 3.3%. Even so, the bank maintained its estimate that headline inflation will converge to its 3% target in the third quarter of 2026.

The forecast for annual core inflation, which excludes some volatile goods and is considered a more reliable indicator, was revised upwards to 3.7% for the fourth quarter of 2025, compared with the bank's earlier forecast of 3.4%.

Banxico cited the economy's weakness as a factor when it cut its benchmark interest rate earlier this month to 7.75%, bringing the rate to its lowest level in three years.

Central banks often cut interest rates to stimulate the economy, although that can also fuel inflation.

Deputy Governor Jonathan Heath, who was the only member of the five-member board to vote against lowering the interest rate and cited persistent inflation, again raised concerns during Friday's presentation, singling out higher food prices at taco stands and restaurants.

But he said Mexico's economy clearly needs to grow more, saying it's between "lethargy and stagnation."

(Reporting by Sarah Morland, Emily Green, Ana Isabel Martinez and Adriana Barrera; Editing by Daina Beth Solomon and Edmund Klamann)