Mexico’s Inflation Slows as Investors Mull Pace of Rate Cuts

Mexico’s annual inflation slowed slightly more than expected in early January, keeping in play chances of a bigger interest rate cut at the central bank’s next policy meeting.

Author of the article:

Bloomberg News

Alex Vasquez and Maria Eloisa Capurro

Published Jan 23, 2025  •  2 minute read

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(Bloomberg) — Mexico’s annual inflation slowed slightly more than expected in early January, keeping in play chances of a bigger interest rate cut at the central bank’s next policy meeting. 

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Official data released Thursday showed consumer prices rose 3.69% in the first two weeks of the month from the year before, just under the 3.72% median estimate of economists surveyed by Bloomberg and down from the 3.99% reading in late December. 

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Core inflation, which excludes volatile items such a food and fuel, came in at 3.72%, slightly above the 3.69% median estimate. 

Banxico, as the central bank is known, cut its key rate by quarter point for a fourth straight meeting to 10% last month. Policymakers indicated that “in view of the progress on disinflation, larger downward adjustments could be considered in some meetings, albeit maintaining a restrictive stance.”

Fruit and vegetable costs fell 2.67% on the month in early January, and were the biggest drag on inflation, according to the national statistics agency. Good prices rose 0.49% while services edged 0.07% higher. Energy soared 0.82%. 

“The headline print and services costs improved, opening the door for a half-point rate cut,” said Marco Oviedo, an economist at XP Investimentos. Yet, today’s print confirms that prices of goods will no longer drive the disinflation process, which now depends on a weaker economy, he added. 

Tariff Uncertainty

While some central bank members back faster rate cuts due to the possibility of a recession or economic stagnation, Deputy Governor Jonathan Heath said he favors being “more cautious, more gradual and more prudent, because there are many challenges and risks in 2025, starting with Donald Trump,” according to a January interview with Excelsior.

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Indeed, some Banxico members expressed concern about the inflationary impact of tariffs that the US president said he would impose on Mexico, according to the minutes of the last policy decision. One official also warned about the potential consequences on Mexico’s economic activity that tariffs would have, right when the country is dealing with a slowdown in growth. 

The uncertainty on tariffs and odds of a pause to the Federal Reserve’s easing cycle in the US are making some analysts cautious. “It’s more likely that Banxico will deliver another 25bp cut, rather than step up the pace of easing,” wrote Kimberley Sperrfechter, an economist at Capital Economics. 

The central bank, which target inflation of 3% plus or minus one percentage point, holds its next rate-setting meeting on Feb 6.

In the latest Citi survey published this week, 17 of 30 economists see the central bank cutting the benchmark interest rate by a quarter point to 9.75% at the February meeting, while 13 expect at half-point reduction to 9.5%. 

The survey pegs inflation at 3.91% in 2025 and 3.77% in 2026. Analysts also expect the economy to slow for a fourth year in 2025, posting growth of 1% before picking up to 1.8% in 2026. 

“I still think most board members will vote for stepping up rate cuts,” said Andres Abadia, chief economist for Latin America at Pantheon Macroeconomics. “But they could soon hit the brakes if conditions don’t improve.”

—With assistance from Rafael Gayol.

(Updates with economists comments starting in 6th paragraph)

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