Banxico Expected to Cut Interest Rates by 25 Basis Points - Analyst

Bank of America forecasts that the Bank of Mexico (Banxico) will lower its policy rate by 25 basis points to 10.00% at its meeting on December 19. The financial institution expects a divided decision, with at least one member possibly pushing for a more aggressive 50 basis point reduction. Additionally, Bank of America anticipates new guidance from Banxico indicating that rate cuts may be accelerated.

In its guidance in November, Banxico had indicated it would move to cut rates in upcoming meetings. Justifications for the expected rate cuts include core inflation remaining below 4%, a slowdown in the economy despite unexpected growth in the third quarter, and the Federal Reserve's own rate cuts.

Despite these factors, the persistently high headline inflation around 5%, service sector inflation close to 5%, a tight labor market, the depreciation of the Mexican peso, and uncertainties regarding domestic reforms and President Donald Trump's policies create a complex backdrop for monetary policy decisions.

Moreover, the fact that inflation expectations are still above the target of 3.0% is causing Banxico to act cautiously. Taking these considerations into account, Bank of America envisions a gradual yet steady decline in the policy rate for the remainder of this year and into the beginning of next year, expecting the rate to decrease to 8.75%.

However, there is also a risk that Banxico may adopt a faster pace. The bank may implement 50 basis point cuts as early as December and potentially reduce rates more than currently anticipated by Bank of America.