Banxico Delivers Half Point Cut, Considers More of Same Size

Banxico, Mexico's central bank, has delivered a half-point cut to its benchmark interest rate, surprising market expectations and signaling a more dovish stance. The bank lowered its key lending rate by 50 basis points (bps) to settle at 10.50% following a four to five vote by its governing board, announced on Sept. 26. This unexpected move comes as the bank seeks to balance the need to support the economy while maintaining its inflation target.

The half-point cut was not anticipated by the market, as economists polled by Reuters had forecast a 25 bps cut. This larger-than-expected cut signals that Banxico is more confident in the inflation outlook and eager to support the economy. The bank's forward guidance now strongly suggests that it is set to embark on a streak of consecutive rate cuts ahead, potentially bringing the policy rate down to 8.50% by the end of 2025, as estimated by private economists.

The decision to cut rates by a larger margin than expected was driven by an improving inflation outlook and worsening growth prospects. Mexico's inflation has been cooling, with headline inflation hitting 4.58% in September, down from the August figure of 4.99%. This decline in inflation allows Banxico to consider further rate cuts without compromising its inflation target. Additionally, the Mexican economy contracted in the last quarter of 2024 for the first time in more than three years, with a GDP growth rate of -0.6% QoQ. This economic slowdown increases the likelihood of Banxico implementing rate cuts to stimulate growth.



The half-point cut narrows the interest rate differential between Banxico and the Federal Reserve (Fed) from 5.50% to just 5%. This could make the Mexican Peso more attractive to investors, potentially leading to capital inflows and appreciation of the currency. However, gloomy consumer confidence in Mexico could limit the positive impact of the rate cut on the Mexican Peso, as consumers may not be confident enough to spend, which could slow down economic growth.



In conclusion, Banxico's half-point cut was a surprise to the market and signals a more dovish stance by the central bank. This could lead to a faster pace of rate cuts, narrowing the interest rate differential with the Fed, and potentially appreciating the Mexican Peso. However, consumer confidence and geopolitical risks could limit the positive impact of the rate cut on the currency. As the central bank continues to monitor inflation and economic growth, it will consider further rate cuts to support the economy while maintaining its inflation target.