Banxico Cuts Rate for the Third Time

The Bank of Mexico (Banxico) has decided to cut its Interbank Interest Rate by 50 basis points, setting it at 8.50%, effective May 15, 2025. This is the third consecutive reduction this year, a measure intended to boost the country's modest economic expansion. However, the institution warns that persistent global uncertainty, marked by trade tensions and geopolitical conflicts, continues to be a risk factor for the inflationary trajectory.

On May 15, 2025, the Bank of Mexico (Banxico) announced a 50 basis point reduction in its Interbank Interest Rate, setting it at 8.50%. This measure represents the third consecutive cut so far in 2025. The decision was made in a context where annual inflation in Mexico decreased to 3.93% in April 2025, and the domestic economy registered a modest quarterly expansion of 0.2% in the first quarter of 2025, following a period of previous weakness.

Banxico anticipates that the disinflationary process will allow for an additional easing cycle in monetary policy, although a restrictive stance will be maintained to ensure inflation convergence toward the official target of 3% by the third quarter of 2026. This decision reflects a strategic shift toward supporting economic growth, signaling confidence in the disinflationary process. However, this is a calculated risk. The explicit mention of global uncertainties and their potential to reignite inflation (for example, through peso depreciation) indicates that the central bank is operating in a precarious environment. The "calibrated cuts" suggest a cautious approach, but the underlying global instability implies that the success of this monetary policy depends largely on external factors beyond Mexico's control. This entails a delicate balance in which domestic policy is constrained by international volatility.

The Mexican economy showed modest growth of 0.2% in the first quarter of 2025, a marginal recovery after a previous contraction. In domestic markets, interest rates on government securities have trended downward, especially in the short- and medium-term segments, and the Mexican peso has experienced a partial recovery against the dollar.

Globally, the world economy is stabilizing, although developing economies face a more challenging outlook. Global growth is projected at 2.7% in both 2025 and 2026. Developing economies have gained importance, accounting for 45% of global GDP in 2025, up from 25% in 2000, and more than 40% of their exports are directed to other developing economies.

Banxico has identified several risk factors for the inflationary trajectory. Upward factors include a possible exchange rate depreciation, the effects of geopolitical conflicts or trade policies, persistent pressures on core inflation, climate change, and rising production costs. On the other hand, downward factors include a stronger-than-anticipated economic slowdown, a lower pass-through of certain costs to consumers, and a possible decrease in the impact of exchange rate depreciation on prices. Global uncertainty, fueled by US trade tensions and geopolitical conflicts, could revive inflation or deepen the economic slowdown. The economic narrative should not be limited to announcing rate cuts but should explain the complex context. This is Banxico's attempt to navigate a narrow path between stimulating a recovering economy and mitigating significant external risks. The report should emphasize the fragility of the global economic environment and how it directly influences Mexico's monetary policy decisions, affecting citizens' purchasing power and economic stability.

In April 2025, annual headline inflation was 3.93%, with a monthly variation of 0.33%. The Core Price Index, which excludes the most volatile prices, registered a monthly increase of 0.49% and an annual increase of 3.93%, with merchandise prices rising 0.69% and services 0.30%. Meanwhile, the Non-Core Price Index decreased 0.21% monthly but increased 3.76% annually. Within the latter, agricultural products grew 1.60%, while energy and government-authorized tariffs fell 1.59%, mainly due to adjustments to electricity rates for the warm season in 18 cities across the country.

The products with the greatest upward impact in April 2025 were tomatoes (+22.08%), beef (+2.10%), and housing (+0.27%). In contrast, the products with the greatest downward impact were electricity (-12.16%), eggs (-2.50%), and low-octane gasoline (-0.57%).

«The Bank of Mexico lowered its key rate by 50 basis points to 8.50% on May 15, as annual inflation fell to 3.93% in April and the domestic economy posted a modest quarterly expansion of 0.2% after earlier weakness.»