Mexico's central bank considers rate cut amidst U.S. trade uncertainty

Investing.com -- The central bank of Mexico is considering a rate cut of either 25 or 50 basis points in its upcoming decision in February 2025, according to Deputy Governor Jonathan Heath. This decision, however, is complicated by growing uncertainty surrounding U.S. trade.

The final decision will be contingent on the conditions present at the time of the meeting. The bank has been reducing rates by 25 basis points since the start of an easing cycle earlier this year. It showed willingness last week to consider larger cuts as inflation continues to slow.

Heath expressed concern over the potential of tariffs on U.S. imports from Mexico, which adds another layer of uncertainty. In November 2024, President-elect Donald Trump pledged to impose a blanket 25% tariff on goods from Mexico if more action isn't taken to curb the flow of drugs and migrants into the U.S.

Heath stated on Monday that if Trump does not announce a major disruption during his inauguration speech on January 20, 2025, if inflation aligns with projections, and barring any unforeseen shocks, the discussion prior to the February decision could involve cutting the benchmark rate by 25 to 50 basis points.

The decision, according to the 70-year-old economist, will also hinge on factors like the economic outlook, ratings agencies' views, and more information on services inflation, which has remained stubbornly high.

Despite the potential for a rate cut discussion, Heath clarified that a larger adjustment is not guaranteed. He also ruled out any cut larger than 50 basis points from the current 10% rate as completely off the table. The decision may not be unanimous among the board members, as they differ on the speed and size of rate cuts needed to bring inflation back within target.

Heath suggested that a benchmark rate between 8% and 8.5% at the end of 2025 is reasonable, but a variety of factors could influence this.

Analysts polled by the central bank project the Mexican economy to grow by 1.12% in 2025, down from around 1.6% in 2024. They anticipate headline inflation to close 2025 at 3.8%, a decrease from 4.37% at the end of 2024.

The expected slowdown is attributed to caution from the private sector due to an uncertain and high-risk environment, and tight fiscal policy as the government attempts to control the deficit. Heath stated that the longer the sluggishness continues, the more likely the inflation target will be met in the estimated time frame, leading to further lowering of the rate until a neutral stance is achieved.

By 2026, assuming Mexico avoids any negative shocks, Heath predicts inflation will be around 3%, the monetary stance will be neutral, and the economy will be in a phase of robust expansion.

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Source: Investing.com