🏦🇲🇽Cable FX Macro Weekly Note: Banxico June Rate Decision

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Banco de Mexico lowered the benchmark interest rate by 50 basis points to 8.50%, marking the third consecutive 50- basis-point cut. This decision was unanimous among the bank’s five-member governing board and aligned with market expectations, as reported by Reuters and other sources. The policy rate is now at the lowest level since August 2022, the decision to cut follows cuts of 50 basis points in February and March 2025, bringing the cumulative reduction since early 2024 to 275 basis points from a peak of 11.25%.

Headline inflation in April 2025 was 3.93% year-over-year, within Banxico’s target range of 3% ± 1%, though it accelerated from March’s 3.8%. Core inflation rose to 4.06%, a near one-year high, indicating persistent underlying price pressures. Despite this, Banxico viewed the inflation outlook as manageable, supporting further easing. Mexico’s economy showed signs of stagnation, with GDP growth revised down to 0.1% for 2025 (from 0.6%) and a modest 0.2% quarter-on-quarter expansion in Q1 2025. A technical recession was narrowly avoided after a Q4 2024 contraction. Banxico highlighted “persistent economic weakness” as a key driver for the cut. U.S. tariffs, including a 25% levy on auto imports announced by President Trump, posed significant risks to Mexico’s export-driven economy, particularly the auto sector. The Mexican peso’s volatility was noted, but the bank saw room to ease policy to support growth.

Analysts at Goldman Sachs noted Banxico’s inclination to “frontload the rate normalization cycle,” suggesting confidence in continued easing despite external risks. However, desk chatter is not in line with the central bank’ decision, some have called out the move as inflation jumped in the first half of May to 4.22%.

The desk at Banorte reminded us that this week will be packed with tier-1 data ahead of Banxico’s decision, the releases include 1H-June inflation, IGAE activity indicator, and retail sales. Banorte expects the Mexican central bank to deliver a 50bps rate cut with a split vote of 4-1, this will follow two unanimous decisions. Banorte said that the board is likely to maintain a dovish tone and the central bank governor is set to mention there is room for a another half percent rate reduction, their thinking derives from a slowdown in activity and a weaker dollar. Economists at Scotiabank mentioned the recent upticks in Mexico inflation likely stressing Banxico’s board members and predicts this week’s 50bps rate cut likely to be the last of this magnitude. Scotiabank forecasts Banxico to remain on hold after June’s rate cut at 8.0%.