07:00 AM EST, 02/21/2025 (MT Newswires) -- The Bank of Mexico (Banxico) released its Q4 2024 Quarterly Report and the minutes from the February monetary policy meeting this week, noted Societe Generale.

As the Mexican economy faces significant challenges, particularly from United States trade and tariff uncertainties and financial volatility, Banxico may continue to cautiously ease monetary policy given disinflation progress, wrote the bank in a note to clients. This involves balancing the pace and extent of interest rate cuts amid the economy's considerable slowdown.

Following these reports, SocGen anticipates a 50bps rate cut in March, followed by a slower and more sporadic pace of easing throughout the rest of the year and beyond. The bank's year-end Banxico policy rate forecasts for 2025 and 2026 are 8.0% and 7.0%, respectively.

The minutes from the February meeting, while acknowledging significant progress in reducing inflation, highlighted "a new phase in the inflation fight." Current inflation -- with core inflation at about 3.7% -- isn't much different from the historical average.

As a consequence, the central bank's focus must shift from cooling high inflation rates to achieving the 3% target, stated SocGen. This perspective suggests a near- and medium-term rates outlook that balances two viewpoints: 1) there is little need to maintain a tight policy rate necessitated by high inflation in 2021-23, and 2) the monetary policy stance should remain restrictive to allow inflation to converge to the target.

While there seems to be a greater consensus among Board members for a possible 50bps basis point rate cut in March to 9.0%, the pace and extent of additional rate cuts will depend on various other factors, added the bank. Even the potential 50bps March rate cut isn't guaranteed, given prevailing trade and tariff uncertainties and their possible implications for Mexico's economy and finances.

The Quarterly Report mentioned several external risks, such as potential supply chain disruptions if tariffs are implemented, commodity price volatility, and geopolitical conflicts, that could increase inflation in Mexico.

The Federal Reserve's policy stance is less supportive of significant rate cuts by Banxico in the coming quarters, and it is unclear to what extent Banxico's monetary policy trajectory will diverge from the Fed amid prevailing uncertainties. One Board member pointed out in the minutes that the Banxico-Fed rate spread is greater than it was before the COVID-19 pandemic. However, if Banxico implements a 50bps cut in March, this spread will soon fall below its 2015-2019 average.

In its Quarterly Report, Banxico significantly reduced the 2025 growth forecast to 0.6% from an earlier 1.2%, with a range of -0.2% to 1.4%. Given the steep gross domestic product contraction in Q4 2024 and the possibility of a weak start in Q1 2025, there is a high risk of economic stagnation amid an uncertain trade and investment environment, according to the bank.

Policy risks to the investment outlook are significant not only due to unresolved tariff threats but also because of unsettled government policies in the energy sector. Banxico expects growth to recover to 1.8% -- range 1.0% to 2.6% -- in 2026, contingent on improved external demand and economic stability. Growth weakness is also a key downside risk to the inflation outlook.