Banxico Accelerates the Pace of Normalization

The recent monetary policy decision by the Bank of Mexico (Banxico), which reduced the interest rate by 50 basis points to 9.5%, marks a significant moment in the current cycle of monetary normalization. Although the market consensus already anticipated a cut, the 50-basis-point magnitude reflects the majority of the Governing Board members’ confidence that domestic and external economic conditions allowed for a more substantial adjustment. It is worth noting that the vote was not unanimous, as Deputy Governor Jonathan Heath favored a smaller cut of 25 basis points.

This move is in line with the message Banxico issued in December 2024, when it announced that if inflation trends remained favorable and economic conditions permitted, it would consider accelerating the pace of rate cuts. It is the first time in this cycle that the rate has been lowered by 50 basis points, following five 25-basis-point cuts in 2024. The inflation trend has been a key factor: with headline inflation finally falling below 4%—a level not seen since 2021—the central bank has additional room to ease monetary policy without losing sight of its 3% target.

In addition to the positive news on prices, the Mexican economy is showing signs of weakness. During the fourth quarter of 2024, GDP contracted by -0.6% quarter-on-quarter, the first drop since 2021. Moreover, consumer confidence fell again, reaching 46.7 in January 2025, indicating increased caution in household spending. These factors, along with the temporary pause in tariffs by the United States, provided a relatively stable exchange environment that made a more aggressive cut feasible.

Looking ahead, much of the effectiveness of this less restrictive monetary stance in boosting the economy will largely depend on the evolution of external risks, particularly trade negotiations with the United States. In this context, it will be crucial to monitor whether inflation remains within the target range and whether the peso maintains exchange rate stability. If new external pressures arise or inflation deteriorates, Banxico would very likely need to reassess the pace of upcoming cuts.

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