Monetary authority reduces pace of interest rate decreases, setting rate at a 3-year low level
Mexico's Central Bank Cuts Interest Rate, Adopts Cautious Approach
Mexico's central bank, Banxico, has reduced its benchmark interest rate by 25 basis points to 7.75%. This marks the first reduction of 25 basis points since four straight 50-basis-point cuts this year [1].
The decision to cut the rate was made during Banxico's meeting on August 7, 2025, and was a split decision, marking the ninth consecutive cut since early 2024 [3]. The central bank's recent approach has shifted towards a meeting-by-meeting, data-dependent strategy, reflecting caution due to persistent core inflation slightly above target (~4.23%) despite headline inflation easing to about 3.51% [2][3].
Banxico acknowledges global uncertainties and U.S. trade policy dynamics as key factors that could influence future rate adjustments [2][5]. The bank's messaging emphasizes a flexible policy framework to balance domestic inflation control and external uncertainties [2].
The recent inflation data has been positive, with inflation in Mexico slowing in July to 3.51%, its lowest level in nearly five years [6]. However, core inflation remains high at 4.23% [6]. Inflation data will influence future decisions by Banxico, as Thursday's inflation news was positive but core inflation remained high [7].
The peso's strengthening and U.S.-Mexico trade relations also factor into policy considerations [4][5]. Market expectations suggest a slower pace of easing compared to previous aggressive cuts but still gradual easing throughout late 2025 [1][2][5].
Analysts forecast Mexico's economy to grow by just 0.3% by the end of the year [8]. Weak economic growth and uncertainty tied to trade tensions and geopolitical developments offset recent positive inflation news [9].
Banxico's next Board of Governors meeting is scheduled for Sept. 25. The next few weeks will be crucial in guiding the monetary stance, with upcoming releases like the inflation report on August 27 set to provide valuable insights [1][3].
Deputy Governor Jonathan Heath was the lone dissenter, voting to hold the interest rate at 8%. Heath had previously argued to hold the interest rate at 8% last month, stating that it was unrealistic to expect inflation to fall on its own [10].
The BBVA banking group published a research paper stating that the Banxico Board of Governors may be cautious going forward but open to continuing the easing cycle with 25 basis points increments [11]. The BBVA research paper notes that Banxico's statement took into account the behavior of the exchange rate, the weakness of economic activity, and the possible impact of changes in trade policies worldwide [12][13]. The paper also mentions that the possible impact of changes in trade policies worldwide was considered in Banxico's decision [13].
With expectations of further gradual easing, Banxico is likely to deliver one more 25 basis point cut at its next meeting, bringing the policy rate down to around 7.5% by the end of 2025, with a potential terminal rate near 7.0% by early 2026, depending on inflation trends, currency performance, and U.S. monetary policy [1][3][5].
- In light of the decision by Banxico to cut the interest rate, analysts are discussing the potential impact on Mexico's food industry, as lower interest rates could stimulate business loans for food production and distribution.
- Mexico's economy, which relies heavily on the energy sector, may benefit from the central bank's cautious approach, as a lower interest rate could reduce the cost of borrowing for energy businesses, improving their financial health and boosting energy production.
- The recent cuts in the interest rate by Banxico could influence the finance sector, with lower interest rates potentially leading to increased investments and business expansion in Mexico, contributing to the overall growth of the economy.
