- In this note, we present a new model for our monetary policy framework for Mexico using timely economic data as well as other indicators that might weigh on Banxico’s balance of risks, such as USDMXN and the Fed. The model has been signalling a higher probability of a 50bp rate cut since 4Q24. We also present the drivers, quantitative and qualitative, that lie behind our premise that Banxico will cut by 50bp in February.
- Preliminary GDP figures for 4Q24 revealed a contraction. The core weakness of the Mexican economy still stems from a downturn in industrial production. While services have remained resilient, we continue to anticipate a further weakening of the Mexican economy throughout 2025.
- On inflation, we have highlighted the ongoing disinflation in the goods index. While services prices have been persistently higher, this index is beginning to show some moderation. We expect core inflation to end the year at 3.4% YoY and headline inflation at c.3.5% YoY.
- Our recently developed ordinal logistic model estimates the probabilities of various outcomes at a Banxico meeting. Considering the information available at the time of each meeting, our model shows Banxico could have been more “aggressive” since 2H24. Additionally, our model shows that the probability of a 50bp cut has increased since the December meeting despite the Fed’s most recent pause.
- While we use this model to assess short-term probabilities of moves in nominal interest rates, we also rely on our monetary policy rule models to estimate equilibrium real rates. According to our estimates, a monetary policy rate below 7% would be more appropriate in the long term, given current growth and inflation expectations.
- We remain cautious towards the MXN. In the short term, the currency will most likely remain volatile due to US President Donald Trump’s policy rhetoric. Nonetheless, we expect USDMXN to stabilise at c.20.5 in 2H25. Even though a lower interest rate differential would certainly weigh on the currency’s performance, our view is that the response to a more aggressive Banxico would be short-lived.
- Lastly, we still expect a directional steepening in nominal rates, and, in particular, see more value in the 5Y section due to our monetary policy view and steadily higher Mexican risk premiums. In our view, the curve has scope to steepen further.