Introduction to Mexico’s Economic Situation
Mexico’s central bank, Banxico, has lowered its benchmark interest rate for the 10th consecutive meeting. The rate was reduced by 25 basis points to 7.5%, which is the lowest level since May 2022. This decision was made in a 4-1 vote by Banxico’s monetary policy committee, following a similar rate cut by the US Federal Reserve on September 17.
The Reasoning Behind the Rate Cut
The reduction in the interest rate was approved while economic activity in Mexico exhibited sluggishness at the beginning of the third quarter of 2025. This sluggishness is attributed to ongoing concerns about global trade tensions. Banxico faces the challenging task of reducing inflation and stimulating the economy amid weak economic growth, while also considering fluctuating global trade policies.
The Impact of Interest Rate Cuts on Inflation
A monetary easing policy, such as lowering interest rates, could potentially spur the economy. However, it also poses the risk of fueling inflation in Latin America’s second-largest economy. Headline inflation increased to 3.57% in August from 3.51% in July. Additionally, annual core inflation, which excludes volatile items like food and energy, hit 4.26% in the first half of September.
Concerns About Sticky Inflation
The decision to reduce the interest rate by a quarter-point, rather than a half-point, has been interpreted as an indication that Banxico has concerns about sticky inflation, particularly the closely-watched core index. This concern is further demonstrated by Banxico’s updated inflation forecast, which raised its estimate for year-end annual core inflation to 4.0% in the fourth quarter, up from its previous estimate of 3.7%.
Expert Predictions and Implications
Experts, such as Alberto Ramos from Goldman Sachs, expect two more rate cuts of 25 basis points before the end of the year. Gabriela Siller, head of analysis at Banco Base in Mexico City, concurs, stating that Banxico’s forward guidance remains unchanged, implying that the governing board remains open to further interest rate cuts. With two more meetings on its 2025 calendar, the interest rate could potentially finish the year at 7%.
Conclusion
In conclusion, Banxico’s decision to lower its benchmark interest rate for the 10th consecutive meeting reflects the challenging economic situation in Mexico. The bank must balance the need to stimulate the economy with the risk of fueling inflation. As the year progresses, it will be essential to monitor the impact of these rate cuts on Mexico’s economy and inflation levels. With expert predictions suggesting further rate cuts, it will be interesting to see how Banxico navigates these complex economic issues.
