BofA forecasts 125bp rate cuts for Mexico through 2026, pause likely

Bank of America forecasts Mexico's central bank, Banxico, will implement a 25 basis point rate cut in September, projecting a total of 125 basis points in cuts through year-end 2026, lowering the benchmark rate to 6.50%. This outlook is underpinned by expectations of headline and core inflation falling below 4% next year, driven by weak economic activity, soft job creation, and a strong peso. While a near-term pause in the easing cycle is anticipated, BofA notes the primary risk is even lower rates in 2026, indicating potential for a more aggressive easing trajectory than its base case.

Analysis

Bank of America projects Mexico's central bank, Banxico, will initiate a rate-cutting cycle with a 25 basis point reduction in September, part of a broader easing path totaling 125 basis points through year-end 2026. This trajectory is expected to bring Mexico's benchmark interest rate down to 6.50%. The forecast is predicated on the view that both headline and core inflation will fall below 4% in 2025, a trend driven by a combination of weak economic activity, evidenced by a negative output gap, subdued formal job creation, and the disinflationary pressure from a relatively strong Mexican peso. Despite the dovish long-term outlook, a near-term pause in the easing cycle is anticipated before it resumes. Notably, Bank of America identifies the primary risk to its forecast as the potential for an even more aggressive easing cycle, suggesting a dovish skew to the outlook for Mexican monetary policy.

Key Decisions for Investors

• Investors with exposure to Mexican fixed income may consider positioning for lower yields, as the forecasted 125 basis points in rate cuts through 2026 suggests potential for capital appreciation in long-duration Mexican government bonds.
• The prospect of a sustained easing cycle, potentially more aggressive than the base case, presents a headwind for the Mexican peso (MXN); therefore, it is prudent to monitor the currency for potential weakness, especially relative to currencies with less dovish central banks.
• The forecast is contingent on specific economic developments, so investors should closely track Mexico's inflation data, job creation figures, and GDP growth to validate the thesis, as any unexpected strength could delay Banxico's easing path.