Mexico | With the tariff threat in pause, a 50bp rate cut now seems very likely

Summary

Below 4.0% inflation, easing core services inflation, softer aggregate demand, a cooling labor market, a peso that continues to hold up, and an overly restrictive monetary policy stance, keep the door wide open for a larger 50bp cut.

Key points

• Key points:
• Last week, the Fed kept the policy rate unchanged at 4.25-4.50% amid a strong economy, sticky core inflation and continued uncertainty around Trump’s policies.
• Mexico’s headline inflation rate dropped to 3.7% YoY in the first half of January, falling back within Banxico’s target range for the first time since February 2021.
• Core inflation dropped to 3.7% YoY in 4Q24; core services inflation has stayed below 5.0% YoY since last October, a streak not seen in more than two years.
• December's meeting minutes strongly suggested that three members would favor a 50bp rate cut this week despite the increased uncertainty around Trump 2.0.
• There is ample room to cut the policy rate throughout the year while still keeping a restrictive stance (now unwarranted in our view), but making it less restrictive.

Geographies

Topics

Tags