- Mexico: Banxico to cut by 50bps; Strong retail sales against weak wholesale trade
MEXICO: BANXICO TO CUT BY 50BPS
All eyes are set on Banxico's monetary policy meeting, where practically everyone is expecting an additional 50 basis point cut, lowering the target rate to 9.00%. In recent statements and media participations, most Banxico members have shown a clear dovish bias, arguing that the current level of headline inflation warrants a less restrictive rate. Additionally, despite the inflation outlook remaining biased higher and the uncertainty surrounding Mexico-U.S. trade policy, comments from several members point to the impact of economic sluggishness on prices as one of the main reasons for larger rate cut steps.
Recent data suggest that economic weakness at the beginning of the year will be more pronounced than initially expected. Early data points to consumer (and investor) confidence being undermined by uncertainty regarding Trump’s trade policies. Furthermore, as we have previously mentioned, both construction and manufacturing show greater deterioration amid greater risk aversion among investors. With this, analysts’ expectations for GDP growth in 2025 continue to trend downwards, standing at 0.6% in the latest edition of the Citi Survey. Note that most responses do not yet incorporate the imposition of tariffs between North American economies as a base case. However, the mentions of a technical recession in the economy are starting to gain traction. The OECD also revised its global economic outlook, incorporating the implementation of 25% tariffs between USMCA countries, with a drop in Mexico’s GDP of -1.3% in 2025 and -0.6% in 2026.
On balance, tariffs have an inflationary bias, so under this scenario (assuming that Mexico implements retaliatory tariffs), the OECD anticipates a rebound in inflation to 4.4% by the end of the year, which would imply a more complicated outlook for Central Bank decisions. In this same sense, some analysts also increased their year-end inflation expectations, shifting the consensus for end-2025 from 3.88% to 3.90% and from 3.77% to 3.80% in the core component.
Banxico’s more dovish stance contrasts with Federal Reserve’s hawkishness, with the latter’s board only expecting two cuts during 2025. In light of Banxico’s dovishness, we have slightly revised lower our year-end interest rate expectation to 8.25% (from 8.50% previously), but with a downward bias; the consensus median in the latest Citi survey dropped to 8.00% by the end of 2025 and to 7.50% for 2026. We believe that economic sluggishness and inflation below 4.0%, (although the central bank’s target is 3.0%), will continue augur greater cuts. Thus, the focus will be on the tone of the statement, along with possible updates to inflation expectations, as these two factors will be important to gauge whether Banxico will cut by 25 or 50bps at its next meeting. Looking ahead, in our opinion, despite Banxico’s dovish stance, the lower rate differential between Mexico and the United States, along with upside risks to the inflation outlook will be key factors to remain in restrictive territory by the end of 2025.
STRONG RETAIL SALES AGAINST WEAK WHOLESALE TRADE
In January, retail sales rebounded by 2.7% y/y, compared to -0.2% in December, ending eight months of declines. By components, the most significant increase was in online sales at 19.1% (6.6% previously), textiles rose 15.3% (2.4% previously), grocery and tobacco sales slowed to 6.8% (9.3% previously), motor vehicles and parts recovered to 2.0% (-1.8% previously), among others. On a monthly basis, retail sales increased by 0.6%. Additionally, wholesale trade suffered a decline of -5.1% y/y, from -3.4% previously, with six of its seven components in negative territory. The most pronounced drop was observed in intermediation, with -26.8% y/y (-35.3% previously), while the largest increase was in groceries and tobacco at 1.3% y/y (3.6% previously). Monthly, wholesale sales fell -2.3%, from -1.8% previously. Despite the increase, the sales outlook is affected by international uncertainty and job creation slowdown, so we expect some weakness in both wholesale and retail sales in the coming months (chart 1).
—Rodolfo Mitchell, Brian Pérez & Miguel Saldaña
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