Introduction
Financial analysts anticipate that the Bank of Mexico (Banxico) will announce a 25 basis point cut in the Target Rate on September 25, placing it at 7.50%. This move would position the rate in a neutral territory, as Banxico predicts inflation will continue to decline over the next three quarters.
Banxico’s Mandate and Recent Inflation Data
Banxico’s primary mandate is to maintain price stability and currency purchasing power through monetary supply control and setting a neutral rate that doesn’t affect business production. Mexico’s inflation target is 3% ± 1 percentage point.
Given that monetary policy impacts aren’t immediate and can take 6 to 18 months to reflect in the economy, it’s crucial to consider inflation trends, monetary authority expectations, and market conditions.
At the start of September, INEGI reported that general inflation in August reached 3.57%, within Banxico’s target range, showing a downward trend over the past year. Subjacent inflation was 4.23%, with a moderate upward trend over the same period. Banxico expects inflation to remain at 3.00% starting from the second quarter of 2026.
Fiscal Measures and Their Inflationary Impact
However, new fiscal measures in the 2026 Package will increase prices for certain goods and services, including tobacco, nicotine products, flavored beverages, gambling games and lotteries, violent video games, and import tariff adjustments. This could raise inflation by approximately 40 basis points.
Public Reaction to Fiscal Measures
The public response to these fiscal measures was swift. While 28.72% of families supported the decision for its health benefits, 59.59% (six out of ten) rejected it due to its economic impact. The remaining 11.69% showed indifference, according to Dinamic, a software analyzing public conversations on social media with proprietary AI and data science experts.
US Federal Reserve’s Policy and Its Impact on Mexico
The US Federal Reserve (Fed) cut its reference rate by 25 basis points the previous week, immediately affecting the Mexican peso and pushing it to a high of 18.23 units per dollar since July 2024. This appreciation benefits imports and external debt payments.
The Fed’s accommodative stance may pressure Banxico to adjust its monetary policy, especially if the interest rate differential narrows and capital flows towards the US. A weaker dollar could also make Mexican exports more expensive, affecting competitiveness in certain sectors.
US Federal Reserve’s Policy
On September 17, the Fed set its reference rate within a range of 4.00% to 4.25%, signaling support for a productivity-focused economy showing signs of weakness and raising questions about future monetary direction.
This cut, the first after eight months of stable rates, suggests the tightening cycle has ended despite risks of stimulating aggregate demand and distorting long-term inflation expectations. For Mexico, the challenge is to capitalize on this opportunity while keeping an eye on contagion and volatility risks.
Given ongoing risks and volatility, incorporating financial instruments in strategies to mitigate these variables—whether in standardized markets or OTC operations—would be prudent.
Key Questions and Answers
- What is the anticipated action by Banxico? Financial analysts expect a 25 basis point cut in the Target Rate, placing it at 7.50%.
- What is Banxico’s primary mandate? Maintain price stability and currency purchasing power through monetary supply control.
- What are recent inflation trends in Mexico? General inflation is at 3.57%, within the target range, while subjacent inflation is 4.23% with a moderate upward trend.
- How will fiscal measures impact inflation? New fiscal measures could raise inflation by approximately 40 basis points.
- What was the public reaction to fiscal measures? 59.59% of families rejected the measures due to their economic impact.
- How did the Fed’s recent rate cut affect Mexico? The peso appreciated, benefiting imports and external debt payments. However, a weaker dollar could make Mexican exports more expensive.
- What is the current US Federal Reserve reference rate range? 4.00% to 4.25%
