No Surprise as Banxico Pushes Ahead with Rate Cut, but the Outlook Is Murkier

• As was widely anticipated, the Bank of Mexico’s (Banxico’s) Board of Governors voted in a unanimous decision to reduce the overnight rate by 25bps to 10.25%, bringing the cumulative amount of loosening since the cutting cycle began in April to 100bps.
• In its statement, the Banxico Board noted recent peso weakness following Donald Trump’s election victory but also commented that this weakness has been reasonably contained relative to prior episodes and that financial market volatility more generally has subsided.
• Policymakers saw little downside risk from pushing ahead with their cutting cycle, particularly considering easing core inflation pressures that are a function of softness in economic activity.
• Expectations are for another 25bps cut in December, with the overnight rate to be lowered to 8.00% (up from previous forecasts of 7.50%) by end-2025 in response to officials’ concerns about weakness in economic activity that will likely outweigh fears about the inflationary impact of peso depreciation linked to Donald Trump’s return to the White House.
• Risks to the forecasts are tilted to the upside, though there is a case to be made for Banxico to facilitate FX depreciation if Trump pushes ahead with tariff plans, given its role as a shock absorber.

(Source: BMI)