Monetary authorities curb the pace of interest rate reductions, ultimately pushing rates to their lowest levels in three years.
Banxico Reduces Interest Rate to Boost Economic Growth Amid Inflation Moderation
The Bank of Mexico (Banxico) has announced a gradual monetary easing policy, with its latest move being a 25 basis-point reduction of the benchmark interest rate to 7.75%. This marks the ninth consecutive reduction since early 2024, as Banxico seeks to stimulate economic growth while managing inflation.
The decision to slow down the pace of interest rate cuts comes after four consecutive 50 basis-point cuts earlier in 2025. The central bank is now signaling a more measured approach, with expectations for smaller 25-bp cuts moving forward, potentially ending 2025 with a policy rate near 7.0%.
Headline inflation has cooled to around 3.51% as of July 2025, close to the long-term target of 3%, but core inflation remains elevated at about 4.23%. Banxico aims to strike a delicate balance between lowering inflation and stimulating economic activity, which is facing challenges such as weak economic growth, trade tensions, and geopolitical developments.
The central bank's strategy prioritizes inflation management, with Banxico projecting inflation to converge to the 3% target by Q3 2026. However, the bank has revised short-term core inflation expectations upward due to a rebound in prices for goods and services.
Banxico's next Board of Governors meeting is scheduled for Sept. 25. The central bank's forward guidance retains strategic ambiguity, reinforcing a data-dependent approach, with no explicit preference for the next move. The absence of new language in the statement suggests the board will be cautious going forward, but they remain open to continuing the easing cycle, albeit at the current more gradual pace of 25 basis points.
The interest rate cut has compressed yields on Mexican peso bonds, reflecting improved inflation expectations and a more accommodative stance. However, this yield compression raises questions about the attractiveness of Mexican bonds amid potential volatility.
In conclusion, Banxico’s current monetary policy strategy balances measured interest rate cuts aimed at supporting a slowing economy while cautiously watching inflation dynamics and external risks from trade tensions and geopolitical factors. The approach reflects a flexible framework that prioritizes inflation convergence, economic growth support, and responsiveness to evolving global conditions.
[1] Banxico's press release: [Link to the press release] [2] BBVA Research report: [Link to the report] [3] Reuters article: [Link to the article] [4] Bloomberg article: [Link to the article] [5] Financial Times article: [Link to the article]
- The latest announcement from Banxico, the Bank of Mexico, indicates a shift towards a more gradual monetary easing policy, with hopes of boosting economic growth through the reduction of interest rates in the energy sector, potentially influencing the cost of goods and services, and consequently, the price of food.
- With the recent interest rate cut, Banxico aims to stimulate growth in the business sector, particularly finance, as the lower rates could improve liquidity and encourage investment, which could in turn boost economic activity.
- Despite the gradual reduction in interest rates, Banxico remains vigilant about inflation, aiming to strike a balance between managing inflation and supporting economic growth, particularly in light of challenges such as trade tensions and geopolitical developments.
