Mexico's Inflation Expected to Return to Target in Early July

Mexico's headline inflation is expected to slow to 3.64% in early July, returning to the central bank's target range, according to a Reuters poll of 11 analysts. However, core inflation is forecast to accelerate to 4.30%, its highest level since mid-2022. The central bank cut its key interest rate by 50 basis points to 8.0% last month, with officials considering a more gradual approach in future decisions.

Title: Mexico's Inflation and Central Bank Rate Outlook

July 02, 2025 - Mexico's headline inflation is projected to decelerate to 3.64% in early July, returning to the central bank's target range, according to a Reuters poll of 11 analysts. However, core inflation is forecast to accelerate to 4.30%, its highest level since mid-2022. The central bank recently cut its key interest rate by 50 basis points to 8.0%, with officials considering a more gradual approach in future decisions.

The Bank of Mexico (Banxico) has reduced its key rate from 10% to 8% so far in 2025, coinciding with a material appreciation of the peso against the US dollar. This has provided a positive backdrop for further rate cuts, as long as the peso maintains its stability. Mexican consumer price inflation has risen from 3.6% to 4.3% over the same period, but remains in line with the average inflation rate seen over the past decade and a half [1].

Banxico's interest rate buffer, calculated to be at zero currently, was at around 3% before the recent rate cuts. The central bank has room to cut rates further from a domestic perspective, but very little from an international one. The differential between Banxico's rate and the US Federal Reserve's funds rate is currently 3.7%, 100 basis points below the 15-year average. If the Fed were to cut rates by another 100 basis points, it would provide Banxico with the necessary comfort to lower its rate to 7.5% [1].

President Claudia Sheinbaum has expressed agreement with Banxico's recent rate cuts, stating that further cuts would help attract investment. She emphasized that a lower interest rate would lead to more loans and investment in the country. While Mexico's central bank is constitutionally independent, Sheinbaum's predecessor, Andres Manuel Lopez Obrador, often pressured the central bank to lower borrowing costs [2].

The Mexican economy faces challenges with inflation remaining above target and a high central bank rate. However, the recent appreciation of the peso and the potential for further Fed rate cuts provide a positive outlook for Banxico's rate policy. The central bank will likely adopt a more cautious approach, aiming to balance inflation control with economic growth.

References
[1] https://think.ing.com/opinions/assessing-rate-cut-potential-for-brazil-and-mexico/
[2] https://www.tradingview.com/news/reuters.com,2025:newsml_L1N3TF0QM:0-mexico-s-sheinbaum-says-she-agrees-with-central-bank-s-rate-cuts/