MNI POLICY: Tariff Risks Tilt To Downside For Banxico

The Central Bank of Mexico increasingly sees a net downside impact from U.S. tariffs on its calculation of its overall balance of risks, which was still tilted towards higher inflation at the time of its last meeting in March, MNI understands.

At the time of its last decision, Banxico had seen both upside and downside risks to inflation from tariffs, with the upside risk coming from a potential depreciation of the peso while downside risks came from an economic slowdown. Since the meeting, though, the risk of a slower economy from the U.S. trade onslaught has begun to outweigh the inflationary risks in Banxico’s thinking.

The Mexican peso has appreciated from a weak point of 20.84 to the dollar on April 8 and is now trading around 19.50, the strongest since October 2024, soothing concerns about an exchange-rate-driven inflationary surge at the central bank. (See MNI INTERVIEW: Banxico May Pause Rate Cuts After June - Armijo)

While the dollar has fallen amid a general erosion of confidence in U.S. assets and as President Donald Trump has pressured the Federal Reserve to cut rates, the peso has also gained support from Banxico’s rate policy as well as from oil export revenues and a “very productive” call between the U.S. leader and Mexico’s President Claudia Sheinbaum.

In contrast, risks to economic activity now seem more pronounced, especially with expectations of a sharper global and U.S. economic slowdown, which would create more room for further Mexican rate cuts this year.

GOOD DEAL

Most market analysts thought Mexico emerged relatively well from Trump’s "Liberation Day" tariff blitz earlier this month, by avoiding inclusion in further reciprocal tariffs as the country kept in negotiations with the U.S.

In March, after cutting its interest rate by 50 basis points to 9.00% and signaling at least one more cut of the same magnitude at its next meeting in May, Banxico’s board stated that "the economic policy changes introduced by the new U.S. administration have added uncertainty to the forecasts."

"Their effects could create inflationary pressures on both sides of the balance of risks," the statement added. Governor Victoria Rodriguez Ceja also mentioned risks to both sides during the last Inflation Report press conference in February. 

The minutes from the March decision showed that the majority on the board highlighted an increased likelihood of further currency depreciation — which ultimately did not materialize — and, on the other hand, a heightened risk of deeper economic weakening, which now appears more likely.