Mexico's Inflation Slows: Central Bank Steps Up Rate Cuts

Mexico's annual inflation rate eased to 3.59% in January 2025, its lowest level in almost four years, according to data released by the national statistics agency INEGI. This slowdown was slightly more than expected, with economists polled by Reuters forecasting a rate of 3.61% and those surveyed by Bloomberg News estimating 3.63%. The news comes a day after Mexico's central bank (Banxico) accelerated the pace of its interest rate cuts, lowering its benchmark rate by 50 basis points to 9.50%.



Banxico's decision to step up its rate cuts follows a 25-basis-point reduction in January and five 25-basis-point cuts in 2024. The central bank cited cooling inflation and weakness in the country's economy as its reasons for the latest cut. Mexico's economy contracted by 0.6% in the fourth quarter of 2024, the first quarter-on-quarter contraction in more than three years, according to Reuters.

The slowdown in inflation was driven by a fall in food prices, which were down 4.69% on the month, and a slight increase in energy prices, which rose 0.93%. Core inflation, which strips out some volatile food and energy prices, accelerated slightly to 0.41% during the month and 3.66% on an annual basis. This was less than the 3.69% estimated by analysts surveyed by Bloomberg.

The Bank of Mexico's decision to cut its benchmark interest rate is expected to boost economic growth, as lower interest rates make borrowing cheaper for businesses and consumers. This can encourage investment and consumption, which are key drivers of economic growth. Additionally, the slowdown in inflation reduces the risk of a sudden tightening of monetary policy, which could otherwise dampen economic growth.

However, there are still risks that could impact Mexico's economic growth and inflation outlook. The prospect of a trade saga with the United States, which could force the central bank to keep a cautious stance, remains a concern. Uncertainty can also prompt a fall in investment, which pressures activity to the downside and also eases inflation. So, while the recent slowdown in Mexican inflation is a positive development, it is important to monitor the country's economic and political situation to ensure that the positive trends continue.