Bank of Mexico’s 12th Consecutive Interest Rate Cut and Market Implications (2025)

The Bank of Mexico (Banxico) announced its 12th consecutive benchmark interest rate cut on December 18, 2025, reducing the target rate from 7.25% to 7% with a 4-1 vote by its monetary policy committee [1]. This decision followed market expectations, as Banxico had previously cut rates by 25 bps in November 2025 to 7.25% [2]. The central bank also signaled a potential pause in rate cuts before any further reductions in 2026 [1].

In the short term, the Mexican equity market responded positively: the iShares MSCI Mexico ETF (EWW), which tracks Mexican stocks, closed 1.37% higher on December 18, rising from $67.45 to $68.75 [0]. This gain likely reflects investor optimism about lower borrowing costs boosting economic growth and corporate profitability. However, data gaps remain, including the immediate USD/MXN exchange rate reaction and Mexican government bond (TIIE) performance following the cut—information that would provide deeper insights into market sentiment toward Mexico’s economy [0].

1. Positive Equity Reaction Amid Policy Uncertainty
   : The EWW’s upward movement suggests that investors priced in the rate cut as a growth driver, but the central bank’s pause signal introduces medium-term uncertainty about future monetary easing [0][1].
2. Data-Dependent Trajectory
   : Banxico’s forward guidance (pause before 2026 cuts) implies that future decisions will depend on inflation trends and economic conditions, highlighting the central bank’s cautious approach [1].
3. Growth Transmission Risk
   : While lower rates typically support consumer spending and investment, the magnitude of their impact on Mexico’s real economy will depend on effective transmission through the financial system [0].

• Pause Expectations
  : If investors had priced in more aggressive near-term cuts, the pause signal could lead to market adjustments [0][1].
• Inflation Volatility
  : Unexpected changes in Mexico’s inflation rate may alter Banxico’s rate trajectory [0].
• U.S. Economic Spillover
  : As Mexico’s largest trading partner, U.S. economic developments and Federal Reserve policy could overshadow domestic monetary moves [0].

• Lower Borrowing Costs
  : Reduced interest rates may stimulate consumer spending and business investment, supporting economic growth [0].
• Equity Market Support
  : Continued low rates could sustain positive momentum for Mexican stocks (EWW) if growth materializes [0].

• Rate Cut Details
  : 25 bps reduction to 7%, 12th consecutive, 4-1 vote, potential 2026 pause [1].
• EWW Performance
  : +1.37% on December 18, 2025 [0].
• Key Monitorable Factors
  : Inflation trends, U.S. economic conditions, and Banxico’s inflation outlook [0][1].
• Information Gaps
  : USD/MXN exchange rate reaction, TIIE bond performance [0].