The Central Bank of Mexico is still pursuing monetary easing policies aggressively despite economic pressures in the second-largest economy in Latin America. The governing board of Mexico’s central bank has decided to reduce interest rates by a further quarter percent, with interest rates at their lowest level in more than three years, despite inflationary pressures that require a tight monetary policy in a normal economy.
The central bank cuts rates by a quarter point as expected
The five-member governing body cast a vote of 4-1 to cut the overnight interest rate target by 25 basis points to 7%, making this change the eighth consecutive cut in 2025. Each member of the governing body supported the cut, except Deputy Governor Jonathan Heath, whose vote was cast to leave the interest rate unchanged at 7.25% as he took inflation concerns into account.
The widely expected cut is based on the economic conditions that the central bank has observed, including the low economic performance in the region alongside the effects of global trade policy shifts on Mexico’s export-oriented economy. This latest cut marks the start of an unprecedented easing cycle that began in August 2024, indicating that the central bank is committed to economic development despite the observed inflation concerns.
The Bank of Mexico has now lowered its benchmark interest rate after 12 consecutive monetary policy meetings dating back to August 2024, bringing the rate from 11% down to 7%, despite inflation rising to 3.80% annually in November, well above the central bank’s 3% target rate. This creates a challenging policy environment where traditional monetary theory suggests tightening rather than easing measures.
Weakness in the economy justifies a cut in interest rates
“The decision of the governing board is in keeping with the assessment of the current inflationary scenario, primarily taking into account the exchange rate movements, the weakness of economic activity, and the implications of the change in the global trade policy,” Banxico mentioned the rise in inflation, but added that headline inflation would return to the target of 3% in the third quarter of 2026.
However, the board stated that it will consider the timing regarding further adjustments to the reference rate, based on the impact of all factors that influence inflation. This comes as the central bank revised its inflation projections in the fourth quarter and the first half of 2026 due to a less-paced slowdown in the services inflation rate, but still plans to attain the target rate of 3% by the end of next year.
Future policy direction remains data-dependent
The Bank of Mexico has indicated some pauses in terms of further cuts in 2026. This is forthcoming as there are some external pressures on the inflation dynamic around now. The central bank will consider the effect of taxes and tariffs that will come into effect in January. An increase in taxes and tariffs is expected to be temporary.
The expected rate of headline inflation continues at 3.7 percent until the end of the fourth quarter of 2025 and the first quarter of 2026, then declines to 3.3 percent in the second quarter, reaching the target in the third quarter of 2026. The risks to the forecast are biased to the high side, taking into account the depreciation of the peso exchange rate, the persistence of core inflation at 4.43 percent, pressures on cost, among others, potentially related to the realization of geopolitical tensions in international trade related to the Mexican economy.
This protracted easing cycle marks the most aggressive monetary easing cycle in Mexico within recent years and symbolizes confidence of the central bank that the weakness of the economy has higher importance than the priorities of fighting inflation. Such actions indicate intense focus of the central bank on guaranteeing that it supports the domestic economy.
