MNI INTERVIEW: Banxico Limited In Ability To Respond To Trump

The Central Bank of Mexico will be limited in its ability to expand the scope of its easing cycle in response to the impact of U.S. tariffs due to its concerns over inflation, and should hold rates steady in May despite its guidance for another 50-basis-point cut, a former Banxico economist told MNI.

"Although economic activity appears weak, the bank's single mandate — focused on price stability — limits its room for maneuver. The recent stability of the exchange rate gives it some space, but that alone won’t be enough to justify easing without clear signs that inflation will remain under control," Oscar Galvez-Soriano, now a professor at the University of Chicago, said in an interview.

It is likely that Banxico will continue easing throughout the year, given that six monetary policy meetings remain in 2025, Galvez-Soriano said. But he questioned whether the next decision due May 15 will see it keep to its guidance for a repeat of the half-point cut that took its policy rate to 9.00% in March. (See MNI INTERVIEW: Banxico To Keep Easing As Tariffs Hit - Sanchez)

"The best decision Banxico could make in May would be to hold the rate steady and wait for greater clarity, both regarding the tariff issue and the path of inflation. This would allow more room to make a better-informed adjustment in June, should conditions permit," he said.

"Much will depend on the decisions made by the U.S. government regarding potential tariffs on the auto parts industry. The imposition of new tariffs on these key sectors could put pressure on the exchange rate, which in turn could lead to increased inflationary risks.”

While tariffs are a risk to some foreign investment in Mexico, particularly in the automotive sector, the new dynamic could also eventually create opportunities for the country by allowing it to attract Asian or European companies seeking preferential access to the U.S., according to Galvez-Soriano.

"I'm afraid these changes in President Trump's trade policy will impact the United States more than Mexico, especially in terms of inflation and, potentially, a slowdown in economic activity due to higher input costs," he said.

FX PERFORMANCE

Emerging market exchange rates, including in Latin America, have shown some stability despite the uncertain global outlook around Donald Trump’s "Liberation Day" tariff onslaught, he noted.

"This relative stability is due, in part, to the fact that some emerging market central banks have acted more responsibly in recent years, managing to contain inflation and build confidence in their currencies," Galvez-Soriano said.

In Mexico’s case, he said that tight monetary policy in recent years has helped anchor expectations and maintain exchange rate stability.

"Additionally, nearshoring has strengthened Mexico’s position as a strategic partner in North America, bringing in capital flows and foreign direct investment that have also supported the peso. Finally, global financial conditions have stabilized compared to the high volatility experienced in 2022."