Mexico’s central bank is contemplating more aggressive interest rate reductions at its February meeting, according to Deputy Governor Jonathan Heath. In an interview with Reuters, Heath indicated that the board could discuss a cut of either 25 or 50 basis points, contingent on prevailing economic conditions. This signals a potential shift from the recent trend of 25 basis point reductions.
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Potential for Larger Rate Cuts Amidst Trade Uncertainty
The central bank initiated an easing cycle earlier this year, implementing consecutive 25 basis point rate cuts in response to slowing inflation. Last week, the bank signaled its willingness to consider larger cuts if disinflation continues. However, looming uncertainties surrounding U.S. trade policy complicate the decision-making process.
President-elect Donald Trump’s previous threat to impose a 25% tariff on Mexican goods adds a significant layer of risk. Heath emphasized that the February decision hinges on several factors, including the absence of significant disruptions announced by Trump, inflation aligning with projections, and the absence of unforeseen economic shocks. Should these conditions be met, the board could discuss a rate reduction in the range of 25 to 50 basis points.
Factors Influencing the Decision-Making Process
Beyond the trade outlook, several other factors will inform the central bank’s decision. Heath highlighted the importance of the overall economic outlook, assessments from ratings agencies, and further data on services inflation, which has proven resistant to decline. He cautioned that even if a larger cut is discussed, it’s not guaranteed to be implemented. Furthermore, a rate reduction exceeding 50 basis points is highly unlikely.
Internal disagreements among board members regarding the pace and magnitude of rate cuts could also lead to a non-unanimous decision. Heath suggested that a benchmark rate between 8% and 8.5% by the end of 2025 seems reasonable based on current information, but acknowledged that various factors could influence this projection.
Economic Outlook and Inflation Expectations
Analysts predict a modest 1.12% economic growth for Mexico in the coming year, down from approximately 1.6% this year. Headline inflation is anticipated to reach 3.8% by the end of 2025, a decrease from 4.37% at the end of 2024. Heath attributed the projected slowdown to private sector caution stemming from an uncertain and high-risk environment, coupled with a restrictive fiscal policy aimed at deficit reduction.
He noted that continued sluggishness increases the likelihood of achieving the inflation target within the estimated timeframe, potentially leading to further rate cuts until a neutral monetary stance is reached.
Long-Term Outlook: Achieving Price Stability and Economic Growth
Heath expressed optimism that in the absence of negative shocks, inflation could reach 3% in 2026, allowing for a neutral monetary policy and robust economic expansion. This long-term view suggests that the central bank is committed to achieving price stability while supporting sustainable economic growth. The upcoming February meeting will be crucial in determining the next steps in this ongoing balancing act.
