Banco de México (Banxico) is likely to lower interest rates again, with a forecast change from 8.50% to 8%, based on a Reuters poll of 21 out of 26 economists. Although inflation in Mexico is above the 3% target, there are ongoing discussions about whether the central bank should cut rates even more. Among the five economists surveyed, three favor a gradual easing of rates, while two recommend keeping rates unchanged. Deputy Governor Jonathan Heah suggested pausing the 50 basis point cuts to analyze more data.

Expected Easing Pace

Fifteen respondents from the Reuters poll expect a slower pace of easing, with the next review in August. Many of these economists predict that the benchmark interest rate will stay at 7.50% by Q3 2025. Banxico’s goal is to maintain the Mexican Peso’s value (~MXN) and control inflation, aiming for a midpoint target of 3% between 2% and 4%. Interest rate adjustments are their main tool; higher rates can attract investment but can also cool down the economy. Decisions by the US Federal Reserve significantly impact Banxico’s policies, especially after Covid-19, when early rate hikes were necessary to stabilize Mexico’s currency and economy. Currently, Banxico is showing a calculated shift in policy. A majority of analysts back the move from 8.50% to 8%, but the timeline for further rate cuts might not match market expectations. Inflation remains above target, a crucial detail affecting the bank’s current sentiment. The benchmark target is 3%, and staying above that level signals caution among policymakers. Heah’s suggestion to avoid sharp movements, specifically the 50 basis points cuts, reflects a desire among board members to monitor progress before making further changes. This conservative approach is often seen during times when they must consider international factors, particularly the Fed’s policies. The Mexican Peso does not act alone, and currency valuation stability is vital in Banxico’s decisions, which often align with US rate trends.

Moderate Adjustments Expected

Currently, fifteen economists in the survey do not expect a quick easing of rates. This indicates a slower pace, possibly just one or two more cuts before the end of the year, depending on inflation. This is a shift from a few months ago when deeper cuts were envisioned. The August meeting will play a role in future decisions, but until then, traders should watch inflation data, guidance, and peso fluctuations against the dollar. Additionally, we see longer-term expectations moving towards a base rate of 7.50% by late 2025, suggesting a cautious medium-term outlook and indicating that the bank is wary of reducing rates too quickly. Banxico’s actions aim to balance supporting the domestic economy while still maintaining a strong stance on fighting inflation. Policymakers are closely observing both internal consumption and external monetary influences. Interest rate changes directly affect inflation expectations, wage growth, and the Peso’s strength, creating a tight balance. Given these factors, we expect modest and conditional movements in policy. The more cautious board members advocating for stability strengthen their position with every new data release. Until domestic inflation is steady within the 2-4% range, we should not anticipate aggressive actions, even if some sectors of the economy hope for more. Traders must carefully consider the cost of carry, especially if their positions are sensitive to short-term rates. What happens next will depend not only on Banxico but also on external rate environment pressures. For now, a cautious easing approach based on solid data rather than speculation is the prevailing outlook. Create your live VT Markets account and start trading now.

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