The Central Bank of Mexico, known as Banxico, has unanimously decided to cut its interest rate by 25 basis points, bringing it down to 10.00%.
This decision suggests that the bank's easing cycle will continue in the coming months. However, the future trajectory of this cycle will heavily depend on the performance of the Mexican peso.
The interest rate reduction was widely anticipated. Out of 23 analysts surveyed by LSEG Data & Analytics, 21 correctly predicted the 25 basis point cut.
The remaining two analysts had forecast a larger reduction of 50 basis points. The decision to further ease monetary policy was largely influenced by a decline in inflation to 4.6% year-on-year in November, alongside the relative stability of the peso following the U.S. elections.
The accompanying statement provided a mix of messages. Policymakers noted a "greater persistence of inflation in services," prompting them to revise their inflation forecasts upward.
Inflation is now projected to align with the target in the third quarter of 2026, a shift from the previously estimated fourth quarter of 2025. The board perceives risks as "tilted to the upside," with the potential implementation of tariffs on U.S. imports from Mexico adding uncertainty.
However, officials also hinted at the possibility of "greater downward adjustments" due to progress made on disinflation. The implementation of these adjustments will largely depend on the peso's performance, especially if Mexico faces U.S. import tariffs under the Trump administration.
A significant decline in the peso could lead policymakers to halt their easing cycle.
Economist Kimberley Sperrfechter from Capital Economics expressed skepticism about Banxico accelerating the pace of easing in the near term. She noted, "With the peso vulnerable to sharp declines if Trump imposes tariffs on Mexico, persistent fiscal risks, and the Fed in an aggressive stance, we believe Banxico will continue to cut its benchmark rate in 25 basis point increments."
She added, "Our forecast for the benchmark rate to drop to 8.50% by the end of 2025 is above the consensus. Moreover, if anything, the risks to that forecast are to the upside, especially if Trump imposes tariffs and the peso falls sharply."