The Mexican Central Bank will continue to cut interest rates sharply.
2025-02-11
■ The Mexican central bank decided to cut interest rates by 0.50%, the first time in four and half years, and hinted that it would continue to cut interest rates significantly in the future.
■ If inflation continues to slow and the economy is sluggish, the Mexican peso may depreciate further.
On February 6, the Mexican central bank agreed to cut the policy rate from 10.00% to 9.50% at its monetary policy meeting. This is the fifth consecutive rate cut, and the sharp 0.50% rate cut is the first in four and a half years, bringing the policy rate to the lowest level since September 2022. The central bank's outlook for inflation is the same as the last meeting on December 19 last year, and it is expected that the overall inflation rate will fall back to the middle of the central bank's target range (3.0%±1.0%) in the third quarter of 2026. The central bank pointed out that there are upside and downside risks to inflation and hinted that a similar monetary policy stance may continue in the future, which means that the sharp interest rate cuts will continue.
The January consumer price index (CPI) released on February 7 rose by 3.59% year-on-year, slowing for three consecutive months and falling below the central bank's target ceiling (4.0%) for the first time in four years. Although core inflation has slightly accelerated to 3.66%, the market generally expects that the central bank may continue to cut interest rates by 0.50% at the next meeting on March 27.
US President Trump had previously said that he would impose a 25% tariff on Mexican imports, but after a call with Mexican President Sheinbaum, he agreed to postpone the implementation for one month. The depreciation of the peso and the tariff issue have exacerbated concerns about the resurgence of inflation. Mexico's exports (especially the automotive industry) rely on the US market for 80%, so the deterioration of US-Mexico relations will bring economic downside risks. Mexico's initial real GDP in the fourth quarter of 2023 fell by 0.6% month-on-month, the first contraction in nearly three years. If it continues to grow for two consecutive quarters, it will officially fall into recession.
After entering February, the peso plummeted to the 21.28-peso range against the US dollar and then rebounded. However, due to the Trump administration's proposal of a "reciprocal tariff" plan, the peso's rebound was hindered and it is currently hovering in the 20.29-peso range. At the same time, affected by the expectation of a rate hike by the Bank of Japan, the appreciation of the yen pushed the peso against the yen to the 7.30-yen range**. The market remains wary of the depreciation of the peso and the appreciation of the yen caused by the narrowing interest rate differential.
The Mexican peso may weaken further if the final GDP data released on February 21 and the CPI data for the first half of the month released on February 24 confirm Mexico's slowing inflation and economic downturn.
■ If inflation continues to slow and the economy is sluggish, the Mexican peso may depreciate further.
On February 6, the Mexican central bank agreed to cut the policy rate from 10.00% to 9.50% at its monetary policy meeting. This is the fifth consecutive rate cut, and the sharp 0.50% rate cut is the first in four and a half years, bringing the policy rate to the lowest level since September 2022. The central bank's outlook for inflation is the same as the last meeting on December 19 last year, and it is expected that the overall inflation rate will fall back to the middle of the central bank's target range (3.0%±1.0%) in the third quarter of 2026. The central bank pointed out that there are upside and downside risks to inflation and hinted that a similar monetary policy stance may continue in the future, which means that the sharp interest rate cuts will continue.
The January consumer price index (CPI) released on February 7 rose by 3.59% year-on-year, slowing for three consecutive months and falling below the central bank's target ceiling (4.0%) for the first time in four years. Although core inflation has slightly accelerated to 3.66%, the market generally expects that the central bank may continue to cut interest rates by 0.50% at the next meeting on March 27.
US President Trump had previously said that he would impose a 25% tariff on Mexican imports, but after a call with Mexican President Sheinbaum, he agreed to postpone the implementation for one month. The depreciation of the peso and the tariff issue have exacerbated concerns about the resurgence of inflation. Mexico's exports (especially the automotive industry) rely on the US market for 80%, so the deterioration of US-Mexico relations will bring economic downside risks. Mexico's initial real GDP in the fourth quarter of 2023 fell by 0.6% month-on-month, the first contraction in nearly three years. If it continues to grow for two consecutive quarters, it will officially fall into recession.
After entering February, the peso plummeted to the 21.28-peso range against the US dollar and then rebounded. However, due to the Trump administration's proposal of a "reciprocal tariff" plan, the peso's rebound was hindered and it is currently hovering in the 20.29-peso range. At the same time, affected by the expectation of a rate hike by the Bank of Japan, the appreciation of the yen pushed the peso against the yen to the 7.30-yen range**. The market remains wary of the depreciation of the peso and the appreciation of the yen caused by the narrowing interest rate differential.
The Mexican peso may weaken further if the final GDP data released on February 21 and the CPI data for the first half of the month released on February 24 confirm Mexico's slowing inflation and economic downturn.