Banxico: Rabobank anticipates a May rate reduction and a prudent approach

Rabobank Revises Banxico Rate Cut Timeline

Molly Schwartz and Christian Lawrence, strategists at Rabobank, now anticipate that Banxico will implement a final 25 basis point rate reduction in May 2026, resulting in a policy rate of 6.50% by the end of the year. They point out that the outlook for Mexico’s economic growth leans negative, while inflation is currently being influenced by short-lived, non-core factors. The main risk to their projection is that Banxico may opt not to lower rates further.

Earlier Rate Cut Expected from Banxico

Reflecting on Banxico’s latest meeting minutes, the Rabobank team has shifted their forecast for the next 25bp rate cut from June to May. Their year-end policy rate estimate remains at 6.50%. They also note that Banxico’s most recent decision was made prior to the release of March’s CPI inflation data.

During its last meeting, Banxico’s Governing Board voted by majority to reduce the overnight interbank rate by 25 basis points to 6.75%, continuing its monetary easing. The Board assessed that, despite previous cuts, monetary policy remains tight and suitable given subdued economic activity, ongoing slack, and inflation mainly caused by temporary price shocks. They stressed that their approach aims to prevent secondary inflation effects while supporting a gradual return to normal policy settings. Future policy moves will be guided by new data and changing external circumstances, particularly developments in the Middle East.

Looking forward, the Board will assess the timing and necessity of any further rate reductions based on macroeconomic trends and financial conditions. All factors influencing inflation and external risks will be closely monitored to ensure the policy rate supports a steady convergence of headline inflation toward the 3% target over the forecast horizon.

Given the current environment and the Board’s inclination to prioritize economic weakness and overlook short-term inflation fluctuations, Rabobank has updated its outlook. They now expect Banxico to lower rates by 25 basis points at the upcoming meeting on May 7, with a projected terminal rate of 6.50%. However, the likelihood of no further cuts remains a significant risk to this forecast.

(This report was generated with the assistance of artificial intelligence and reviewed by an editor.)