Banxico Speeds Rate Cuts as Inflation Eases in Mexico

Mexico's inflation trajectory has prompted Mexico’s Central Bank (Banxico) to accelerate interest rate cuts as the economic landscape shifts. With inflation easing and economic and trade uncertainties posing challenges, policymakers are recalibrating their approach to balance financial stability and growth.

Banxico recently reduced its benchmark interest rate by 50 basis points, lowering it from 10% to 9.50%. This marks a shift from four consecutive 25-basis-point cuts and is the first 50-basis-point reduction since August 2020. The decision was supported by a majority of the central bank’s Governing Board, with Deputy Governor Jonathan Heath advocating for a smaller reduction.

“The Board will take into account the effects of economic activity weakness, as well as the impact of the restrictive monetary policy that has been in place and will continue to influence inflation trends within the monetary policy horizon,” stated Banxico in its report. “Any actions taken will ensure that the benchmark rate aligns with the necessary trajectory to facilitate the orderly and sustained convergence of general inflation toward the 3% target within the expected timeframe.”

This policy adjustment follows signs of slowing inflation. According to the National Institute of Statistics and Geography (INEGI), annual inflation in the first half of January fell to 3.69%, down from 4.21% at the end of 2024. Core inflation, which excludes volatile items like energy and agricultural products, also declined to 3.72%, placing inflation within Banxico’s target range of 3% ± 1 percentage point.

“Our work is not over. The fight against inflation is now in a new phase,” said Victoria Rodriguez, Governor, Banxico, emphasizing the bank's commitment to managing inflation while supporting economic growth, as reported by Reuters. 

Trade Uncertainty and Inflation Risks

Mexico's economy also faces risks from potential trade disruptions. President Donald Trump recently signed an executive order imposing a 10% tariff on Chinese goods and initially proposed a 25% tariff on imports from Canada and Mexico. While the tariffs on Mexico were postponed until Mar. 1 following diplomatic negotiations, they remain a significant risk to the country’s economic outlook.

Banxico’s move toward a more aggressive rate-cutting strategy aligns with its broader goal of maintaining economic stability while mitigating external risks. Despite the reduction, Mexico’s interest rate remains well above that of the US Federal Reserve, which has paused its rate-cutting cycle at 4.25%–4.50%.

Further rate cuts may be possible if inflation continues to decline. “To face the challenges of this new phase, we need lower interest rates,” Rodríguez stated. However, she also stressed that Banxico stands ready to intervene if financial markets experience significant disruptions.