MNI WATCH: Dovish Banxico Indicates At Least One More 50BP Cut

The Central Bank of Mexico signaled Thursday it will deliver at least one more 50-basis-point cut at its next meeting in May, following the decision to reduce interest rates by a half point to 9.00%.

The dovish move came amid significant improvement in inflation and weakness in economic activity.

"The Board estimates that looking ahead it could continue calibrating the monetary policy stance and consider adjusting it in a similar magnitudes. It anticipates that the inflationary environment will allow to continue the rate cutting cycle, albeit maintaining a restrictive stance," the English version of statement said.

The aggressive cut and the signal of future easing were already expected by the market, but there were doubts about whether Banxico would commit to forward guidance with a cut of the same magnitude at the next meeting, rather than leaving the size open-ended.

It was the second cut of this magnitude after four moves of 25 basis points. Besides the dovish decision itself, Banxico said the balance of risks has improved despite remaining biased to the upside.

"The changes in economic policy by the new U.S. administration have added uncertainty to the forecasts. Its effects could imply inflationary pressures on both sides of the balance," said the document.(See MNI INTERVIEW: Trump Means Banxico Must Be Cautious -Heath)

ONGOING DESINFLATION

Banxico emphasized that the disinflation process continues well on track and reiterated that the "fight against inflation" is in another stage, to bring inflation from its current level around its pre-pandemic historical average to the 3% target.

"It considered that reference rate levels lower than those set as a result of the global shocks are consistent with the challenges posed by the present stage, including the possible impact of changes in trade policies worldwide," said the statement, in reference to trade tariffs imposed by U.S. President Donald Trump.

The main argument for the aggressive easing is the improvement of the inflation outlook, especially the core measure.  (See MNI INTERVIEW: Banxico Not Tied To Multiple 50BP Cuts-Borja)

"Headline inflation remained at levels unseen since early 2021, reaching 3.67% in the first fortnight of March 2025. Core inflation registered 3.56% during the same period, slightly below its average level between 2003 —when the 3% permanent target was set— and 2019," the central bank said.

"Headline inflation expectations for the end of 2025 decreased while those for longer terms remained relatively stable at levels above target," the statement added.

CONVERGING TO TARGET

The board also said inflation forecasts remain unchanged, and headline inflation is still expected to converge to the target in the third quarter of 2026.

The weakness of activity and the resilience of the exchange rate amid Trump's trade policy uncertainty were mentioned as well.

"The Mexican economy is expected to exhibit weakness once again in the first quarter of 2025. The environment of uncertainty and trade tensions poses significant downward risks," the statement added.

"Since the previous monetary policy decision, Mexico’s government interest rates decreased in all terms. The Mexican peso slightly appreciated, although it traded in a wide range."

Despite concerns over trade policy, the Mexican peso has been performing relatively well, remaining around 20.30 per U.S. dollar, down from the stronger level of 20.73 on March 3.