Analysts from Sura Predict Further Interest Rate Reductions by Banco de México
According to analysts from the insurance firm Sura, Banco de México, led by Victoria Rodríguez Ceja, will continue its cycle of interest rate reductions, bringing the rates down to 7.75% by year-end.
Banco de México’s Greater Visibility Compared to the Fed
Unlike the Federal Reserve (Fed), Banco de México has better visibility on the inflation trajectory, allowing it to chart its monetary policy strategy more confidently, explained Joaquín Barrera, the director of fixed income and investments at Sura.
Sura’s Economic Outlook for the US and Mexico
Valentín Martínez, Sura’s vice president of product administration, emphasized that their central scenario is a slowing US economy without falling into recession, which in turn moderates Mexico’s economic performance. The expected scenario for Mexico “is not as promising… we do not foresee a depressed economy, but it will transition to a slower pace.”
Fed’s Monetary Policy and Its Impact on Banco de México
Barrera explained that the Fed’s FOMC, which will release its third scheduled monetary announcement of the year later today, will maintain a pause in the interest rate cycle during its upcoming meetings in May and June. Only in the second half of the year will they implement two 25-basis-point cuts.
Mexico’s Attractiveness to Investors Amidst Rate Cuts
Even with the interest rate cuts, Mexico remains attractive to investors due to its relatively high yields compared to other emerging market safe-havens, such as Chile and Peru, which offer yields of around 5%, Barrera noted.
Post-Rate Cut Scenarios and Currency Impact
Once Banco de México completes its rate cuts, likely to happen next year, there will probably be a depreciation effect on the Mexican peso exchange rate, according to Barrera.
- There is still ample opportunity for investors to capitalize on these valuations before the peso depreciates.
- Historically, when interest rates are lowered, emerging market currencies tend to gradually depreciate due to reduced interest rate differentials.
Barrera anticipates that Banco de México will continue its normalization cycle next year, reducing rates by an additional 75 basis points, bringing the rate down to 7%.
Uncertainty Surrounding the Fed and Inflation
Barrera explained that the situation for the Fed is much more uncertain. There is still no clarity on how tariffs will impact inflation, as US companies have already incurred additional costs, and Mexican products’ tariffs are only applied after they clear customs.
- Companies are strategically waiting for President Trump to signal a pause in tariffs before moving their stored goods, exploiting these timing opportunities and eventually passing the increased costs onto consumers.
- Sura estimates that Mexican products not covered by the T-MEC will face a 29% tariff, making their consumer prices 30% higher. For Chinese products, the tariff will be 80%, resulting in an 80% price increase.
- The Fed will monitor how these tariffs affect consumer purchasing decisions and the overall economic slowdown’s impact on consumers’ purchasing power.
