Banxico Cuts 2025 Growth Forecast, Flags Higher Short Term Inflation

The Bank of Mexico delivered a markedly more cautious economic outlook on November 26, trimming its projection for 2025 growth to roughly 0.3 percent, down from a previous estimate of 0.6 percent. The quarterly report pointed to a third quarter contraction of 0.3 percent and persistent weakness in industrial production, notably in auto exports to the United States, as key factors behind the downgrade.

Banxico left its medium term trajectory largely unchanged, keeping a 2026 growth forecast near 1.1 percent and projecting 2.0 percent for 2027. At the same time the central bank adjusted its short term inflation forecasts upward for the late 2025 and early 2026 period, signaling that price pressures will be somewhat stickier than previously expected. The combination of weaker activity and a slight upward revision to near term inflation has tightened the policy trade off for monetary authorities.

Since mid 2024 Banxico has been easing policy, trimming its benchmark interest rate in a gradual cycle aimed at supporting growth while steering inflation back to a 3 percent target. That campaign now faces heightened scrutiny inside the bank. Deputy governors raised differing views in recent meetings about the pace of further cuts and about the credibility of meeting the 3 percent inflation goal by mid 2026. Those internal divisions underscore the uncertainty the board must weigh as it balances support for growth with the need to anchor expectations.

The economic signals underpinning Banxico's revisions are concrete. A 0.3 percent contraction in the third quarter interrupted a fragile recovery and was accompanied by weaker industrial output. Auto shipments to the United States have softened, feeding through to manufacturing activity and export related investment. Given the autos sector's outsized role in Mexico's factory exports, a sustained slowdown in U.S. vehicle demand or supply chain disruptions could further depress activity and delay any meaningful rebound.

For markets and policymakers the implications are immediate. Higher short term inflation projections reduce the room for rapid rate cuts and increase the risk that the central bank will adopt a more cautious path than markets may have priced. Slower policy easing would weigh on domestic borrowing costs and could temper the boost fiscal and private investment planners hoped to receive from quicker monetary loosening.

Looking beyond the next year, the revised forecasts highlight a broader challenge for Mexico: turning short run cyclical setbacks into a sustained upward shift in potential growth. With 2026 and 2027 growth forecast at modest rates, the economy faces a protracted period of subdued expansion unless productivity, investment and external demand accelerate. For Banxico the immediate task will be to navigate a narrow corridor, trimming policy support enough to foster recovery without undermining its inflation anchor. The November report makes clear that corridor has narrowed.