Central Bank of Mexico's Rate Decision Considerations

Investing.com — The central bank of Mexico is contemplating a rate cut of either 25 or 50 basis points in February 2025, as stated by Deputy Governor Jonathan Heath. This potential decision is affected by growing uncertainties regarding U.S. trade.

The final verdict will be influenced by prevailing conditions at the time of the meeting. The bank has been decreasing rates by 25 basis points since the easing cycle began earlier this year, showing openness last week to discussing larger cuts as inflation continues to taper.

Heath voiced worries about the impact of potential tariffs on U.S. imports from Mexico, adding another layer of uncertainty. In November 2024, President-elect Donald Trump announced a plan to levy a blanket 25% tariff on goods from Mexico unless more actions are taken to reduce the influx of drugs and migrants into the U.S.

Heath indicated on Monday that if Trump refrains from announcing a significant disruption during his inauguration speech on January 20, 2025, and provided that inflation aligns with forecasts, discussions ahead of the February decision might consider cutting the benchmark rate by 25 to 50 basis points.

The decision will also depend on various factors, including economic outlooks, views from ratings agencies, and additional information regarding services inflation, which has remained persistently high.

Despite the possibility of a rate cut discussion, Heath clarified that a larger adjustment isn't assured and ruled out any cut beyond 50 basis points from the current 10% rate as completely unlikely. The decision may not be unanimous among board members, who have differing opinions on the speed and scale of cuts needed to bring inflation within target.

Heath suggested a reasonable benchmark rate between 8% and 8.5% by the end of 2025, though this is subject to various influences.

Analysts surveyed by the central bank forecast the Mexican economy to grow by 1.12% in 2025, a decline from around 1.6% in 2024. They expect headline inflation to finish 2025 at 3.8%, down from 4.37% at the end of 2024.

The anticipated slowdown is attributed to private sector caution in an uncertain, high-risk environment and tight fiscal policies aimed at deficit control. Heath noted that prolonged sluggishness increases the likelihood of meeting the inflation target within the estimated timeframe, which could lead to further rate reductions until a neutral monetary stance is reached.

By 2026, assuming Mexico avoids negative shocks, Heath predicts inflation around 3%, a neutral monetary stance, and an economy in robust expansion.

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