Mexico’s Central Bank to Lower Interest Rate
The central bank of Mexico is expected to lower its key interest rate to 7% at its meeting on December 18, according to a Reuters poll of economists. This would be the 13th cut since February 2024, after the benchmark cost of borrowing hit a record 11.25%. The bank, known as Banxico, has been working to stimulate the economy, which has been experiencing soft conditions.
Expected Rate Cut and Future Projections
All 29 economists polled between December 8-11 expect the benchmark rate to be cut by a quarter percentage point to 7.00% from 7.25% at Thursday’s meeting. However, they are almost evenly split on whether policymakers will follow through with another cut early next year. Just over half of the analysts with a view into next year expect one or two more cuts by end-March, with the rest forecasting a pause in the long easing cycle.
Analysts’ Views
Analysts at Morgan Stanley said, "Despite lingering inflation pressures, we still expect a 25bp cut. However, these pressures, January’s health-related taxes and potential tariff pass-through raise the likelihood of a February pause." Another economist, Ivan Arias, at Banamex, expects the bank to pause in the first quarter to analyze price pressures stemming from the imposition of tariffs and taxes, and then resume easing with a couple of cuts in May and June to reach a terminal rate of 6.50%.
Economic Conditions and Inflation
Last month, Banxico trimmed its growth forecast for Mexico’s economy to near zero and maintained an estimate for a slow 1.1% expansion in 2026. The annual inflation rate accelerated more than expected in November to 3.80%, with one of the central bank’s board members warning of additional risks for the coming year. The bank has reiterated its view that inflation would hit the 3% target by the second half of next year but slightly raised forecasts for consumer price rises for some periods ahead.
Comparison with US Federal Reserve
The expected move by Banxico would put the central bank on a similar track to the U.S. Federal Reserve, which cut interest rates this week but signaled the bar was high for further easing in the near term. This cautious approach is likely to be reflected in Banxico’s policy statement, which will reinforce a cautious tone as worries about soft economic conditions are offset by higher inflation risks amid a still uncertain trade outlook.
Conclusion
In conclusion, Mexico’s central bank is expected to lower its key interest rate to 7% at its meeting on December 18, with a possible pause in the easing cycle in the first quarter of next year. The bank’s decision will depend on various factors, including inflation pressures, economic growth, and trade outlook. As the bank navigates these challenges, it is likely to maintain a cautious tone, similar to the US Federal Reserve, and make adjustments to its monetary policy as needed to support the economy.
