The Banxico has cut its main policy interest rate twice in 2024, once by 0.25% in March and by 0.25% in August, bringing the Banxico policy rate down to 10.75%. 

The August cut came as a surprise as headline inflation remained elevated at 5.57%, but according to the Banxico Governor, Victoria Rodriguez Ceja, the decision was based on the expectation that headline inflation would come down eventually. Core prices in Mexico are much lower at 4.05% in July, its eighteenth straight month of declines.

“We expect these effects of the shocks that we observe in non-core inflation to be transitory, so we are still expecting headline inflation to return to its target at the same time, at the end of 2025,” said Rodriguez Ceja in an interview with El Financiero.

Economists at Capital Economics, however, argue that inflation in Mexico will fall only gradually because of stubbornly high dwelling inflation. This is due to a combination of lack of housing stock supply and continued rising household income. 

“Housing inflation has become an increasingly important driver of core services inflation in Mexico – a key concern of the central bank, Banxico. And we think that robust household income growth and a lack of supply of dwellings will keep housing and, by extension, headline inflation higher than most expect in the next couple of years. This supports our view that Banxico’s easing cycle will be very gradual and that interest rates will stay high by past standards,” says Kimberley Sperrfechter, Emerging Markets Economist at Capital Economics. 

A more gradual approach to cutting interest rates would probably keep them higher in Mexico compared to counterparts. This would support the Mexican Peso, since it will favor foreign capital inflows into the currency, given it offers higher interest rate returns to investors