Banxico lower rates by 25 basis points, signals further easing

• Unanimous decision reflects changed stance since September; further rate cuts may follow as inflation outlook improves.
• Banxico emphasizes continuing economic challenges but sees potential for easing as non-core inflation effects diminish.
• Inflation expected to reach target by Q4 2025, with updated projections suggesting a gradual disinflationary trend.

The Bank of Mexico cut rates by 25 basis points for the fourth time since March 21, diminishing Mexico's primary reference rate from 10.50% to 10.25%. It's worth noting that the decision was unanimous after Deputy Governor Jonathan Heath voted to hold rates unchanged at the September meeting.

Bank of Mexico reduces key rate to 10.25%, citing improving inflation outlook and downside economic risks

In its monetary policy statement, Banxico acknowledged that the balance of risks to economic activity growth is skewed to the downside. They added, "the nature of the shocks that have affected the non-core component and the projection that their effects on headline inflation will dissipate over the next quarters."

The board added the inflationary scenario "will allow further reference rates adjustments," and although it requires a restrictive monetary policy stance, the evolution of the disinflation process "implies that it's adequate to reduce the level of monetary policy restriction."

Banxico updated their forecasts for 2024, 2025 and 2025. The board projects that headline inflation will converge to the bank's 3% target in Q4 2025.

USD/MXN Reaction to Banxico's decision

The USD/MXN spiked toward 20.55, before printing new daily lows below 20.45. Despite this, the exotic pair bias is tilted to the upside, unless sellers push the exchange rate below 20.00, ahead of testing the 50-day Simple Moving Average (SMA) at 19.74. On the upside, buyers had a clear path to testy year-to-date (YTD) highs at 20.80, if they reclaim 20.50.