Mexico | Banxico set to deliver another 50bp cut despite signs of slower disinflation

Summary

In contrast to the Fed, who held rates unchanged last week, Banxico has room to continue cutting rates. A low exchange rate pass-through and deeper domestic capital markets grant Banxico greater policy independence from the Fed than in the past.

Key points

• Key points:
• The Mexican economy avoided a technical recession in 1Q25, but underlying economic weakness continues to justify further monetary easing.
• Following April's inflation data and three straight 50bp rate cuts, the Board may adopt a less dovish tone in its forward guidance on the pace of future rate moves.
• With no inflation risks stemming from exchange rate developments, Banxico has room to further unwind its still excessively restrictive policy stance.
• The ex-ante real policy rate remains at 5.25%, well above Banxico’s estimated neutral range (1.8-3.6%), justifying another 50bp cut this week.
• But forward guidance may become slightly less dovish, reflecting both stronger-than-expected inflation and the likely upward revisions to Banxico’s inflation forecasts.

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