The Bank of Mexico (Banxico) surprised markets by cutting its policy rate by 25 basis points to 6.75% yesterday, according to ING’s Chris Turner [1]. Despite the rate cut, Banxico’s inflation forecasts remained largely unchanged since February, with only modest increases of 0.1% and 0.2% for headline and core CPI year-on-year rates, respectively [1]. The central bank continues to project inflation returning to its 3.00% target in early 2027 [1].
Turner argues that easing policy in the current environment is risky, suggesting Banxico is less concerned about currency weakness compared to other emerging market central banks [1]. He notes that the Mexican Peso remains vulnerable, especially as Banxico had previously indicated a preference for USD/MXN not trading well below 17.00 [1]. As a major emerging market currency and a proxy hedge for the EM complex, the Peso could face further downside.
Turner warns that negative news from the Middle East could trigger a correction in USD/MXN, potentially moving the pair back up to the 18.50/70 region [1]. No immediate market reaction or analyst consensus was provided beyond ING’s view, but the tone suggests caution regarding the Peso’s resilience following the rate cut [1].
CONCLUSION
Banxico’s unexpected rate cut to 6.75% has raised concerns about the Mexican Peso’s vulnerability, with ING highlighting the risk of further depreciation, especially in the face of external shocks. The unchanged inflation outlook and forward guidance suggest Banxico is prioritizing growth over currency stability. Market participants should remain alert to potential volatility in USD/MXN, particularly if negative geopolitical developments arise.