A Reuters poll shows that on March 27, the Banco de Mexico (Banxico) is likely to reduce interest rates by 50 basis points, dropping from 9.50% to 9.00%. Out of 25 economists surveyed, 23 anticipate this decrease, while two predict no change.
This potential cut follows a previous reduction in February, where the rate was lowered from 10.00% to 9.50%. The decision comes amid an economic slowdown that has influenced policymakers to adjust rates, as cooling economic activity is expected to ease inflation pressures.
Maintaining Inflation Targets
Banxico’s primary objective is to maintain low and stable inflation around its target of 3%. It employs interest rates as a tool to manage inflation; increased rates typically curb inflation while lower rates can weaken the Mexican Peso (MXN).
The central bank meets eight times a year and closely monitors the actions of the US Federal Reserve, often adapting its policies in response. For instance, Banxico raised rates ahead of the Fed after the Covid-19 pandemic to protect the Peso and prevent capital outflows.
Next week, Banxico will also consider various economic indicators, including mid-month inflation and Retail Sales.
What we see here is a central bank navigating its next move carefully, with most analysts expecting a 50-basis-point reduction in borrowing costs on 27 March. All but two of the 25 economists polled believe policymakers will follow their February decision with another cut, bringing rates down to 9.00%. This expectation is rooted in slower economic growth, which has already started to take some pressure off inflation.
Impact On Markets
The central bank’s goal remains keeping inflation steady at around 3%, using interest rates as its main lever. When borrowing costs are high, inflation tends to be lower, but it also makes it more expensive to take on debt, which can slow the economy. When rates drop, the currency often takes a hit, making imports more costly but also helping boost demand.
There’s also a cross-border element to consider. The institution in charge of monetary policy does not operate in isolation—it watches what the Federal Reserve does and adjusts accordingly. This was clear after the Covid-19 pandemic, when it moved ahead of the Fed to prevent the Peso from losing value and ensure capital remained within the country.
The next gathering of officials will take into account fresh price data and Retail Sales figures before making a move. Traders working with derivatives based on interest rates, inflation, or currency moves will need to factor all this in.
