Mexico's Central Bank Considers Rate Cuts Amid U.S. Trade Uncertainty
According to Jonathan Heath, Deputy Governor of the Bank of Mexico, the bank is considering a rate cut of 25 or 50 basis points in its upcoming decision in February 2025. However, this decision is complicated by increasing uncertainties regarding U.S. trade.
The final decision will depend on the prevailing conditions at the time of the meeting. The bank has been reducing interest rates by 25 basis points since starting a easing cycle earlier this year. Last week, it expressed a willingness to implement larger cuts as inflation continues to slow.
Heath expressed concerns about the possibility of tariffs being applied to imports from Mexico to the U.S., adding another layer of uncertainty. In November 2024, President-elect Donald Trump pledged to impose a general tariff of 25% on goods from Mexico if no further measures are taken to stem drug and migrant flows.
In a statement on Monday, Heath noted that if Trump does not announce a major disruption at his inauguration on January 20, 2025, and if inflation remains in line with forecasts without any unexpected shocks, the discussion prior to the February decision could involve reducing the benchmark interest rate by 25 to 50 basis points.
According to the 70-year-old economist, the decision will also depend on factors such as the economic outlook, ratings agency opinions, and persistently high service inflation.
Despite the ongoing discussion about a potential rate cut, Heath clarified that a larger adjustment is not guaranteed. He also stated that any reduction greater than 50 basis points from the current rate of 10% is completely off the table. The decision may not be unanimous among board members, as there are differing views on the pace and magnitude of the necessary rate cuts to bring inflation back within target.
Heath suggested that a benchmark interest rate between 8% and 8.5% by the end of 2025 is reasonable, though various factors could influence this.
Analysts surveyed by the central bank forecast that the Mexican economy will grow by 1.12% in 2025, down from approximately 1.6% growth in 2024. They expect headline inflation to drop to 3.8% by the end of 2025, down from 4.37% at the end of 2024.
The anticipated slowdown is attributed to the private sector behaving cautiously in an uncertain and high-risk environment and the government's tight fiscal policy due to efforts to control the deficit. Heath indicated that the longer the stagnation lasts, the higher the likelihood that the inflation target will be met within the projected timeframe, and interest rates may be further lowered until a neutral stance is reached.
By 2026, Heath predicts that if Mexico manages to avoid any adverse shocks, inflation could be around 3%, the monetary policy stance would be neutral, and the economy would be in a strong expansion phase.