Banxico Minutes: Weaker growth and lower inflation keep rate-cut bets alive
- Banxico sees Q4 2024 GDP contraction, with 2024 growth slowing to 1.5%.
- Inflation falls to 3.69%, within Banxico’s 2-4% target range.
- Most members anticipate further inflation decline, keeping the rate-cut path open.
Banco de Mexico, also known as Banxico, revealed its monetary policy minutes for the decision announced on February 6. The central bank decided to lower borrowing costs by 50 basis points (bps) to 9.50% via a 4 to 1 vote split, with Deputy Governor Jonathan Heath supporting a 25 bps rate cut.
Key highlights
All members pointed out that the weakness of the Mexican economy intensified in the fourth quarter of 2024.
Most members stated that, according to the flash estimate, GDP contracted with respect to the previous quarter. They highlighted that annual GDP growth would have been 1.5% in 2024 as a whole, in contrast to the growth above 3% in each of the previous two years.
Most members indicated that investment slowed down markedly in 2024.
The majority anticipated that the Mexican economy will continue growing at low rates in 2025.
Some members mentioned that the balance of risks to growth is biased to the downside.
Most members agreed that a possible impact on trade flows between Mexico and the United States would result in a decline in Mexican economic activity.
All members agreed that there has been a significant progress in resolving the inflationary episode derived from the shocks of the pandemic and the war in Ukraine.
Most members pointed out that the behavior of core inflation reflects the progress attained. They commented that the inflationary outlook seems more favorable than in the most critical moments of the inflationary episode.
Most members noted that since the last monetary policy meeting, headline inflation decreased to 3.69% in the first fortnight of January 2025.
Most members highlighted that headline inflation returned to the 2-4% variability range for the first time since then.
Another member added that annual headline inflation has declined 501 basis points since the peak of the current inflationary episode. One member asserted that, nevertheless, it remains above target.
Most members stated that the most recent decline in headline inflation was associated with the significant reduction in noncore inflation.
The majority noted that in its most recent reading core inflation reached 3.72%. They commented that it has been below 4% for four and a half months.
Most members emphasized the importance of the expectations channel in the transmission of monetary policy. They highlighted that these have remained anchored despite the complexity of the recent inflationary episode. They asserted that this is the result of Banco de México's firm response.
Most members mentioned that inflation is expected to continue declining as previously anticipated.
Banxico FAQs
The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.
The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.
Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.
Author
Christian Borjon Valencia
FXStreet
Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.
