The Threat of Trump's Tariffs and Their Impact on Banxico's Rate

If Donald Trump carries out the tariffs announced for Mexico on February 1, the exchange rate could experience another period of instability that would complicate the decision for the Bank of Mexico (Banxico) to lower interest rates. "The depreciation of the peso in Mexico generates more inflation," said Carlos Capistrán, chief economist at Bank of America Securities. "I believe that Banxico is not going to reduce (the rate)."

The analyst emphasized that the tariffs have a contradictory impact on inflation in Mexico: on one hand, the drop in the peso may lead to more inflation, while on the other hand, it could slow down economic activity, which would help control inflation. Capistrán explained that, according to the most recent data, commodity prices have started to rise, which was helping to keep inflation in check. Moreover, many of the goods in Mexico are imported, and since the presidential election, the peso has lost over 20% of its value, which will be reflected in the prices of imported products. Even if Trump imposes tariffs and Banxico cuts the rate, the depreciation of the peso would lead to high inflation, and eventually, the central bank would have to raise the rate again. Bank of America Securities projects that by the end of the year, Banxico will set the rate at 8.75% and that economic growth will be at 0.8%.

It is crucial for the Bank of Mexico to maintain a cautious stance regarding these external changes, as a misaligned monetary policy could negatively impact investor confidence. The financial environment requires ongoing assessment to manage inflation and sustainable growth, as well as to face challenges that might arise from trade conflicts. The decisions made by the central bank should be aligned with the goal of maintaining the country’s economic stability.