Mexico's Central Bank Cuts Interest Rate

Investing.com — Mexico's central bank, Banxico, has unanimously agreed to a 25 basis point cut in its interest rate, reducing it to 10.00%.

The decision indicates that the bank's easing cycle will continue in the upcoming months, although its future direction will heavily depend on the performance of the Mexican peso.

Widely anticipated, 21 out of 23 analysts surveyed by LSEG Data & Analytics correctly predicted this 25 basis point cut, while two expected a more aggressive 50 basis point reduction. The choice to relax monetary policy was influenced by the decrease in inflation to 4.6% year over year in November, along with the peso's relative stability following the US election.

Accompanying the rate cut, policymakers noted a "greater persistence in services inflation", leading them to revise their inflation forecasts upwards. Inflation is now projected to align with the target in Q3 of 2026, a shift from the previously estimated Q4 of 2025. The board perceives risks as biased to the upside, partially due to potential tariffs on US imports from Mexico.

Policymakers hinted at the possibility of larger downward adjustments, contingent on the peso's performance, especially if tariffs are imposed. A significant drop in the peso might lead to a halt in their easing cycle.

Kimberley Sperrfechter, economist at Capital Economics, expressed doubt that Banxico will rapidly increase the pace of easing. She highlighted the peso's vulnerability to sharp declines due to potential tariffs from Trump, lingering fiscal risks, and the Federal Reserve's hawkish stance. Sperrfechter projects a reduction in the policy rate to 8.50% by the end of 2025, which is above consensus, with risks skewed to the upside if the peso weakens further.

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