Monetary authorities scale back on rate reductions, nevertheless, lower interest rates to a 3-year minimum level
Banxico Announces Gradual Interest Rate Reduction, Aims to Balance Inflation and Growth
The Bank of Mexico (Banxico) has announced that it will continue its cautious easing cycle, with interest rates expected to gradually decline from the current 7.75% towards a terminal rate around 7.0% by early 2026. This decision was made at Banxico's Board of Governors meeting scheduled for September 25.
In a move that was anticipated after the central bank's indications of smaller reductions being likely, Banxico adjusted its forecast for headline inflation in the third quarter, lowering it to 3.8% from 4.1%. However, the outlook for Mexico's monetary policy indicates a more gradual pace of rate cuts amid inflation that remains slightly above target and global uncertainties impacting external conditions.
Recent actions show that Banxico has cut rates by 25 basis points in August 2025, following a 50 basis-point cut in June, marking the ninth consecutive reduction since early 2024. This pace has moderated compared to earlier, signaling an approach calibrated to balance inflation control with economic growth.
Core inflation forecasts were marginally increased in the short term due to rebounding goods and services prices, although headline inflation has been revised downwards and is expected to converge to Banxico’s 3% target by Q3 2026. GDP growth has been modest but showed some upside in Q2 2025, suggesting a soft but positive economic backdrop.
Banxico maintains a flexible, data-dependent policy framework. The bank is navigating risks from U.S.-Mexico trade tensions, geopolitical risks, and peso volatility. This has led to some voting dissent within the Governing Board and a "strategic ambiguity" approach in forward guidance.
Analysts largely expect one or two more 25-basis-point rate cuts by year-end 2025, bringing rates closer to 7.0–7.5%. The exact timing and size of future adjustments will depend on inflation trajectories, economic growth, and external factors such as trade policy and global market conditions.
It is important to note that Banxico raised its forecast for Q3 core inflation (which excludes energy and food) from 3.8% to 4.1%. The central bank is facing the challenges of lowering inflation while stimulating the economy, and inflation data will influence future decisions.
In a dissenting vote, Deputy Governor Jonathan Heath called for prudence, arguing that it was "unrealistic to expect inflation to fall on its own just because of stagnant economic forecasts." Heath voted to hold the interest rate at 8%, while the majority of the Board voted to reduce it to 7.75%.
In a statement following the meeting, Banxico considered the behavior of the exchange rate, weakness of economic activity, and possible impact of changes in trade policies worldwide. The statement suggested the board would consider rate changes going forward but withheld specific language regarding future cuts.
Reuters, El Economista, and El Financiero reported on the meeting, with BBVA banking group noting that Banxico's statement retained a data-dependent approach, with no explicit preference for the next move. BBVA suggested that the Board of Governors will be cautious going forward, but they remain open to continuing the easing cycle, albeit at the current more gradual pace of 25 basis points.
Mexico's economy grew by 0.7% in the second quarter of the year, and inflation slowed in July to 3.51%, its lowest level in nearly five years. Shrinking produce and energy prices, as well as acceleration in consumer goods prices, contributed to the inflation rate. Thursday's inflation news was positive, but core inflation remained high at 4.23%.
[1] Banxico's monetary policy outlook reflects a gradual easing path with an emphasis on balancing inflation reduction and growth support, amidst a complex global environment and domestic inflation persistence slightly above target. [2] The central bank remains cautious, flexible, and data-driven in its approach to future interest rate decisions. [3] Analysts largely expect one or two more 25-basis-point rate cuts by year-end 2025, bringing rates closer to 7.0–7.5%. [4] The exact timing and size of future adjustments will depend on inflation trajectories, economic growth, and external factors such as trade policy and global market conditions. [5] Banxico is facing the challenges of lowering inflation while stimulating the economy. Inflation data will influence future decisions, as Thursday's inflation news was positive, but core inflation remained high at 4.23%.
- Banxico's monetary policy is heading towards a gradual lowering of interest rates, aiming to balance the reduction of inflation and the support of economic growth, in a global environment that is complex and characterized by the persistence of domestic inflation slightly above the target.
- The Bank of Mexico is exercising caution, flexibility, and a data-driven approach in making future decisions about interest rates.
- Analysts anticipate one or two more reductions of 25 basis points in interest rates by the end of 2025, bringing rates closer to the range of 7.0–7.5%.
- The specific timing and magnitude of future adjustments will be determined by the trajectory of inflation, economic growth, and external factors such as trade policy and global market conditions.
- Banxico is confronted with the challenge of reducing inflation while stimulating the economy. The inflation data will significantly influence future decisions, as the most recent inflation news was positive, but the core inflation remains high at 4.23%.
