Bank of America reaffirmed its view that Mexico's central bank will lower its key policy rate to 6% by the end of 2026, and it singled out March as the most likely timing for an initial 25 basis point reduction. The projection comes in a research note released after the firm's delegation visited Mexico.
The bank kept this call despite listing several upside inflation risks that could complicate the trajectory toward the central bank's target. In particular, BofA pointed to higher oil and fertilizer prices, rising shipping costs and potential pressures emanating from commodity markets as factors that could push inflation higher than anticipated.
In its assessment, BofA said that Banxico will have concrete arguments to support a March cut. Those arguments include evidence of weak economic activity, a lack of second-round inflation effects stemming from recent tax and tariff adjustments, minimal pass-through of international gas prices to domestic consumer prices and only modest depreciation of the Mexican peso. Taken together, these elements form the rationale the bank expects Banxico to use to justify an early easing move.
The research note also acknowledged that market dynamics could affect the timing of the cut. BofA noted that if volatility in Mexican financial assets rises, Banxico could postpone the initial reduction until May while still maintaining dovish forward guidance. The bank additionally suggested that signaling intentions to cut might itself amplify volatility in Mexican assets.
BofA cautioned about a key downside risk to the disinflation path. If a prolonged conflict in Iran exerts additional pressure across energy, metals and agricultural commodity markets, the bank warned, then proceeding with rate reductions could jeopardize inflation's convergence toward target. This scenario would increase upside pressure on prices and complicate the central bank's ability to ease policy without risking further inflationary spillovers.
Finally, the research note characterized Banxico's approach to policy as moving toward a very backward-looking stance, emphasizing indicators and developments that have already occurred when setting monetary policy. The bank's outlook therefore hinges on current readings for activity, pass-through and exchange rate behavior, as well as on the evolution of global commodity markets.
Key points
- Bank of America expects a 25 basis point rate cut in March and projects Mexico's policy rate at 6% by end-2026.
- BofA cites weak domestic activity, minimal gas price pass-through, muted peso depreciation and absence of second-round tax or tariff effects as justification Banxico may use for an early cut.
- Upside inflation risks identified include higher oil and fertilizer prices, rising shipping costs and broader commodity market pressures; Mexican financial assets could see increased volatility as a result.
Risks and uncertainties
- A prolonged conflict in Iran could push energy, metals and agricultural commodity prices higher, threatening inflation convergence and complicating any policy easing - this would particularly affect energy, agriculture and commodity-sensitive sectors.
- Increased volatility in Mexican assets could lead Banxico to delay an initial rate cut from March to May, altering market expectations for financial and currency markets.