Mixed Messaging from Banco de Mexico

Summary

• On May 15, Banxico announced its decision to cut the overnight policy rate by 50bp from 9.00% to 8.50%.
• The decision was correctly anticipated by Bloomberg surveyed analysts, including ourselves, who were unanimous in our expectations.
• Banxico revised its inflation outlook upward for 2025, but still sees convergence to 0% in 2026.
• The Bank highlighted that the fight against inflation is now at the stage where the “aim is to bring inflation from its current level…to the 3% target,” and that “it took into account the behavior of the exchange rate, the weakness of economic activity and the possible impact of changes in trade policies worldwide.”
• The accompanying statement included the following phrase: “The Board estimates that looking ahead it could continue calibrating the monetary policy stance and consider adjusting it in similar magnitudes.” We believe that the Governing Board is eager to cut and see a 50bp cut at the next decision on June 26.
• Mexico currently faces 25% tariffs for non-USMCA compliant goods, in addition to tariffs on aluminum, steel, and autos. We believe that Mexico is likely to see some reduction in tariffs going forward and are optimistic to the outcome of Trump-Sheinbaum trade negotiations. However, a weakening consumer in the US is still likely to cause Mexico pain.

Mixed Messaging

Banxico decided to lower the target rate by 50bp from 9.00% to 8.50% on May 15. The tone of the statement was largely unchanged from recent decisions, highlighting the aim to reduce inflation from its current levels closer to the 3.0% target, as well as fears surrounding economic contraction and trade uncertainty.

The Bank also revised its inflation forecasts upward for 2025, raising expectations for Q2 2025. In the headline CPI measure, the Bank adjusted its forecasts for Q2 2025 from 3.5% to 3.9% and Q3 from 3.4% to 3.5%. Meanwhile, the core measure was revised from 3.5% in Q2 to 3.9%, 3.4% in Q3 to 3.6%, and 3.3% in Q4 to 3.4%. These adjustments were driven by fears of rising merchandise prices. However, we will also note that Banxico still expects the headline measure to converge to 3.0% in Q3 2026 and expects the core measure to converge to 3.0% in Q2 2026.

On the other hand, the economic picture in Mexico has deteriorated and outlook is bleak. Mexican GDP growth registered only 0.2% q/q in Q1 2025, and market uncertainty coupled with trade risk leaves little room for optimism. As noted previously, Mexico’s economy is heavily linked to that of the US, given that Mexican exports to the US account for around 40% of Mexican GDP. As such, Banxico noted that “prospects for world economic growth, particularly those for the US economy, have been revised downwards.” This suggests that even if the trade outlook for Mexico is positive, Mexico may still be negatively impacted by weakening consumer behavior in the US.

Banxico once again included the claim that “the Board estimates that looking ahead it could continue calibrating the monetary policy stance and consider adjusting it in similar magnitudes. It anticipates that the inflationary environment will allow to continue the rate cutting cycle, albeit maintaining a restrictive stance.” While Banxico would like to see inflation lower, the risks posed to economic activity are too great. We are forecasting a 50bp cut at the next meeting on June 26.

CPI inflation has been creeping higher…

… and GDP growth is slowing

Please see the Bank’s risks to its outlook below:

Banxico’s CPI inflation projections

Table 2: Rabobank FX Forecasts

Banxico Statements

May 15, 2025

Banco de México’s Governing Board decided to lower the target for the overnight interbank interest rate by 50 basis points to 8.50%, effective May 16, 2025. World economic growth is estimated to have expanded during the first quarter of 2025 at a rate lower than that observed in the previous quarter. In view of the foreign trade tensions, prospects for world economic growth, particularly those for the US economy, have been revised downwards. In this environment of high uncertainty, the US dollar depreciated. Short- and medium-term government interest rates ended the period with mixed results, after having decreased significantly along the yield curve. In most of the main advanced economies, headline and core inflation recently reverted part of the increases registered by both in early 2025. In its latest monetary policy decision, the US Federal Reserve left its reference rate unchanged. Among the most relevant global risks are the escalating trade tensions along with the intensification of geopolitical turmoil and their possible impact on inflation, on economic activity, and on volatility in financial markets. Since the previous monetary policy decision, Mexico’s government interest rates decreased, especially those for the short and medium terms. The Mexican peso appreciated, although it traded in a wide range. The Mexican economy exhibited weakness again during the first quarter of 2025. It registered a low seasonally adjusted quarterly growth rate of 0.2%, after having contracted in the previous quarter. The environment of uncertainty and trade tensions poses significant downward risks. Both headline and core inflation came in at 3.93% in April. Core inflation accumulated eight consecutive months below 4%, although, at the margin, it increased. Headline inflation expectations for the end of 2025 were revised upwards while those for longer terms remained relatively stable at levels above target. Inflation forecasts were adjusted upwards in the short term, mainly due to a greater-than-expected increase in merchandise inflation. Headline inflation is still expected to converge to the target in the third quarter of 2026 (see table). Forecasts are subject to the following risks. On the upside: i) foreign exchange depreciation; ii) disruptions due to geopolitical conflicts or foreign trade policies; iii) persistence of core inflation; iv) cost-related pressures; and v) climate-related impacts. On the downside: i) lower-than-anticipated economic activity; ii) a lower pass-through from some cost- related pressures, and iii) a lower-than-anticipated pass-through of the peso depreciation on inflation. Although the balance of risks for the trajectory of inflation within the forecast horizon remains biased to the upside, it has improved as the global shocks have been fading. The changes in economic policy by the new US administration have added uncertainty to the forecasts. Their effects could imply inflationary pressures on both sides of the balance. The Governing Board reiterated that, since the inflationary episode has been left behind, the fight against inflation is at a stage where the aim is to bring inflation from its current level, around its pre-pandemic historical average, to the 3% target. It considered that reference rate levels lower than those set as a 2 result of the global shocks are consistent with the challenges posed by the present stage. It took into account the behavior of the exchange rate, the weakness of economic activity and the possible impact of changes in trade policies worldwide. Considering the current inflationary outlook and the prevailing level of monetary restriction, with the presence of all its members, the Board decided unanimously to lower the target for the overnight interbank interest rate by 50 basis points to 8.50%. The Board estimates that looking ahead it could continue calibrating the monetary policy stance and consider adjusting it in similar magnitudes. It anticipates that the inflationary environment will allow to continue the rate cutting cycle, albeit maintaining a restrictive stance. It will take into account the effects of the country’s weak economic activity and the incidence of both the restrictive monetary policy stance that has been maintained and the stance prevailing in the future on the evolution of inflation throughout the horizon in which monetary policy operates. Actions will be implemented in such a way that the reference rate remains consistent at all times with the trajectory needed to enable an orderly and sustained convergence of headline inflation to the 3% target during the forecast period. The central bank reaffirms its commitment to its primary mandate and the need to continue its efforts to consolidate an environment of low and stable inflation.

March 27, 2025

Banco de México’s Governing Board decided to lower the target for the overnight interbank interest rate by 50 basis points to 9.00%, effective March 28, 2025.

Prospects for world economic growth were revised downwards, including those for the US economy. The adjustments were partly due to various announcements on the imposition of tariffs. In early 2025, inflation exhibited a mixed behavior across the main advanced economies. In its latest monetary policy decision, the US Federal Reserve left its reference rate unchanged. Government interest rates performed differently by region and the US dollar depreciated. Global risks continued increasing. Among these are the escalating trade tensions and the intensification of geopolitical turmoil, and their possible impact on inflation, on the economic weakening, and on volatility in financial markets.

Since the previous monetary policy decision, Mexico’s government interest rates decreased in all terms. The Mexican peso slightly appreciated, although it traded in a wide range. The Mexican economy is expected to exhibit weakness once again in the first quarter of 2025. The environment of uncertainty and trade tensions poses significant downward risks.

Headline inflation remained at levels unseen since early 2021, reaching 3.67% in the first fortnight of March 2025. Core inflation registered 3.56% during the same period, slightly below its average level between 2003 -when the 3% permanent target was set- and 2019. Headline inflation expectations for the end of 2025 decreased while those for longer terms remained relatively stable at levels above target.

Inflation forecasts remain unchanged and headline inflation is still expected to converge to the target in the third quarter of 2026 (see table). Forecasts are subject to the following risks. On the upside: i) foreign exchange depreciation; ii) disruptions due to geopolitical conflicts or foreign trade policies; iii) persistence of core inflation; iv) cost-related pressures; and v) climate-related impacts. On the downside: i) lower-than-anticipated economic activity; ii) a lower pass-through from some cost-related pressures, and iii) a lower-than-anticipated pass-through of the peso depreciation on inflation. Although the balance of risks for the trajectory of inflation within the forecast horizon remains biased to the upside, it has improved.

The changes in economic policy by the new US administration have added uncertainty to the forecasts. Its effects could imply inflationary pressures on both sides of the balance.

The Governing Board deemed that the disinflation process remains well on track and reiterated that the fight against inflation is at a stage where the aim is to bring inflation from its current level, around its prepandemic historical average, to the 3% target. It considered that reference rate levels lower than those set as a result of the global shocks are consistent with the challenges posed by the present stage, including the possible impact of changes in trade policies worldwide. Taking into account the current inflationary outlook and the prevailing level of monetary restriction, with the presence of all its members, the Board decided unanimously to lower the target for the overnight interbank interest rate by 50 basis points to 9.00%. 2 The Board estimates that looking ahead it could continue calibrating the monetary policy stance and consider adjusting it in similar magnitudes. It anticipates that the inflationary environment will allow to continue the rate cutting cycle, albeit maintaining a restrictive stance. It will take into account the effects of the country’s weak economic activity and the incidence of both the restrictive monetary policy stance that has been maintained and the stance prevailing in the future on the evolution of inflation throughout the horizon in which monetary policy operates. Actions will be implemented in such a way that the reference rate remains consistent at all times with the trajectory needed to enable an orderly and sustained convergence of headline inflation to the 3% target during the forecast period. The central bank reaffirms its commitment to its primary mandate and the need to continue its efforts to consolidate an environment of low and stable inflation.