Mexico: March 25bps Cut, Then September?
Banxico decided to cut the policy rate by 25bps from 6.75% due to concerns over the economy, which could be hurt additionally by the Iran war. However, Banxico inflation forecasts are yet to reflect the shift in oil prices and the prospect of further upward revisions argue against a May or June cut. Additionally, the split vote also argues against a Q2 move, though a debate could occur at the June meeting. We expect by September that Banxico will be comfortable in cutting however and we look for a 25bps move to 6.50% followed by a pause throughout 2027.
Figure 1: Banxico Rate Including CE Forecast (%)
Source: Continuum Economics
Banxico concerns about the economy have been added to be the Iran war, which Banxico indicated could hurt the economy further. This potential delay to economic recovery appears more important than the 1st round effects of higher oil prices from the Iran war. Even so, the Banxico vote was split (3 to 2) for the 25bps cut, while the inflation profile was revised only marginally. Q2 2026 up 0.2% and Q3 up 0.1%, with headline inflation back to 3.0% by Q2 2027. Given the 60% jump in 60% oil prices Banxico should be boosting Q2 and Q3 2026 inflation by around 0.6%, which suggests further upwards revisions will be seen for 2026 and hitting 3.0% could be pushed back to H2 2027.
Given that Banxico inflation forecasts are yet to reflect the shift in oil prices and further revisions will likely be seen, this argues against a May or June cut. Additionally, the split vote also argues against a Q2 move, though a debate could occur at the June meeting. Finally, the policy rate is now in the neutral range and easing will be more spaced than 2025. We expect by September that Banxico will be comfortable in cutting however given our baseline of a 4-8 week Iran war. We look for a 25bps move to 6.50% followed by a pause throughout 2027.