Our economic outlook for Mexico

The economy succumbed to the effects of restrictive monetary policy in the fourth quarter of 2024, contracting by 0.6% compared with the third quarter. The restrictive interest rates and U.S.-related policy uncertainty make us bearish on Mexico, where we expect growth in a range of 1.25%–1.75% in 2025. We would expect Mexico’s growth to slow further if the U.S. were to implement tariffs of 25% on Mexican goods and Mexico similarly implemented 25% tariffs on U.S. goods.

The Consumer Price Index fell sharply in January, to 3.59% year over year from 4.21% in December. The pace of inflation is down by nearly a percentage point in the last two months. The pace of core inflation, which excludes volatile food and energy prices, nudged up to 3.66% year over year in January from 3.65% in December. Vanguard expects core inflation to fall to 3.25%–3.5% in 2025, above the midpoint of the 2%–4% target range set by the Bank of Mexico (Banxico).

Banxico’s governing board, taking into account progress on inflation amid still-restrictive monetary policy, voted to cut the overnight interbank rate target by a further 50 basis points, to 9.5%, on February 6. In its previous meeting, in December 2024, Banxico cut the policy rate target by 25 basis points. We expect an easing cycle that began in March 2024, when the policy rate was 11.25%, to continue through 2025. However, Banxico noted that global risks have increased amid escalating trade tensions.¹

The labor market has begun to slow, with employment growing by 1.6% year over year in the last three months, down from a 2.5% year-over-year average in the first half of 2024. We expect a moderation in coming months that would increase the unemployment rate, which has remained largely stable recently.