Banxico Cuts Rates Aggressively In line with market expectations, the Bank of Mexico unanimously decided to implement another consecutive rate cut during its March 2025 monetary policy meeting. The 50-basis-point reduction brought the policy rate down to 9.00%, marking a forceful continuation of the monetary normalization cycle, one that remains behind its regional Latin American peers.
The central bank’s decision mainly reflects a relatively contained inflationary environment and growing concerns about downside economic risks, including the possibility of a technical recession following a visibly weak first quarter. Headline inflation stood at 3.67% in the first half of March, providing Banxico with the necessary room to ease its monetary stance without significantly compromising its 3% inflation target.
The Mexican economic outlook remains clouded by uncertainty surrounding U.S. trade policy. The recent tariff threats from the Trump administration, particularly those targeting imported vehicles and auto parts, could exacerbate Mexico’s economic fragility, given its high dependency on bilateral trade with the U.S. These tariffs, set to take effect in early April, pose a significant threat to the country's economic and monetary stability.
Previously, the foreign exchange market has responded favorably to reversals of initial U.S. tariff announcements, but the persistence and materialization of these threats would place further pressure on the Mexican peso. The automotive sector, a pillar of Mexico’s export structure, is already facing serious challenges, with a significant drop in exports in February, underscoring the country’s vulnerability to external trade restrictions.
Despite these internal and external pressures, Banxico has managed to strike a relative balance, cutting rates to help stimulate economic activity while maintaining a sufficiently tight monetary stance to guard against potential inflation risks. According to the Governing Board, this approach is consistent with the trajectory needed to ensure an orderly and sustained convergence of inflation toward the 3% target by the third quarter of 2026.
For now, one notion circulating in the markets is that the Mexican central bank may keep rates above the neutral level as a safeguard against tariff-related uncertainty and other potential external shocks. This reflects a strategic caution, aiming to balance economic stimulus with financial stability.
Looking ahead, the outlook remains complex. Banxico may continue making similar adjustments in upcoming meetings, always contingent on the evolution of inflation and both domestic and global economic activity. Ultimately, Mexico is facing a critical juncture where monetary policy decisions will play a key role in mitigating current uncertainty and supporting a more stable economic environment.
