A recent survey conducted by Reuters suggests that Banco de Mexico (Banxico) is on track to lower its interest rates by half a percentage point on March 27. This adjustment is seen as a response to a slowing economy and the ongoing process of reducing inflation.
In a look ahead to 2025, economists are predicting that interest rates could dip as low as 8.25%. Out of the 25 economists surveyed, 23 believe Banxico will decrease borrowing costs from 9.50% to 9.00%. Meanwhile, two economists anticipate the rates will remain unchanged.
Should this rate reduction occur, it would mark the second consecutive cut of this magnitude. The first reduction was decided during February’s meeting, where the Governing Council decreased the benchmark rate from 10.00% to 9.50% with a 4-1 vote. Deputy Governor Jonathan Heath dissented, favoring a more modest 25 bps cut.
Despite Banxico’s primary goal of controlling inflation, the current economic slowdown has prompted a policy shift toward easing. Policymakers argue that as the economy decelerates, inflation is likely to follow suit.
Adding to the week’s economic activities, important metrics such as mid-month March inflation, retail sales, and trade balance figures are slated for release.
### Banxico Insights
The Bank of Mexico, commonly referred to as Banxico, serves as the nation’s central bank. Its core mission is to maintain the value of the Mexican Peso (MXN) and manage the country’s monetary policy primarily through inflation control, aiming for a stable target of around 3%. This target falls within a tolerance band of 2% to 4%.
Banxico’s primary monetary policy tool is interest rate management. When inflation exceeds the targeted level, the bank counters it by increasing rates. This makes borrowing costlier, thus slowing down economic activities. Typically, higher rates tend to strengthen the Peso by attracting more investors due to improved yields, whereas lower rates might weaken it. The bank’s interest rate strategy often considers the rate differential with the U.S. dollar and the actions of the U.S. Federal Reserve.
Meeting eight times annually, Banxico’s monetary policy decisions are significantly swayed by the Federal Reserve. The bank’s policy committee usually convenes a week after the Fed to adapt or anticipate changes. For instance, following the COVID-19 pandemic, Banxico preempted the Fed’s rate hikes to safeguard the Peso from devaluation and stave off potential capital flights.
By aligning its strategies with a clear understanding of both domestic and international economic landscapes, Banxico continues to navigate its pivotal role in Mexico’s financial stability.
