What’s going on here?
Mexico’s headline inflation rate eased notably to 4.2% in December, compared to 4.6% the previous month, falling slightly beneath expectations. This deceleration was prominently driven by a decline in food inflation, which hit its lowest since March 2021.
Ongoing disinflation provides room for further interest rate cuts. Source: Haver, abrdn.
What does this mean?
The welcome slump in inflation aligns with Banco de Mexico’s (Banxico) targets, but the persistent core inflation at 3.7% signals that challenges remain. After a 22-month descent, core inflation, when annualized, is now hovering around Banxico’s 3% goal. With this backdrop, Banxico eyes broad rate cuts in 2025 to stimulate growth and consolidate inflation control. Though a mild 25 basis points cut is likely in February, a more aggressive approach of 50 basis points may follow, aiming for a year-end policy rate reduction from 10% to 8.75%. However, uncertainties, especially concerning US-Mexico trade relations and Federal Reserve strategies, might temper Banxico’s strategy.
Why should I care?
For markets: Tracking interest rate trends.
Banxico’s dovish outlook holds significant implications for investors eyeing Mexican markets. Lower interest rates could boost borrowing and investment, potentially spurring growth across sectors like manufacturing and services. However, market participants will watch closely as trade policy developments and US economic signals could affect this trajectory.
