Mexico's sluggish economy, easing inflation put rate cuts in spotlight

By Aida Pelaez-Fernandez

MEXICO CITY, Aug 22 (Reuters) - Mexico's economy grew less than expected in the second quarter of 2025 while inflation showed signs of moderation, a combination that could open the door to more potential interest rate cuts from the central bank as it navigates a volatile trade climate.

The Bank of Mexico had a day earlier said it was considering future rate cuts, arguing that a sluggish economy and cooling labor market suggest inflation could continue to decline.

Latin America's second-largest economy grew 0.6% in the three months through June compared with the prior quarter, according to official data published Friday, slightly below forecasts. Both the national statistics agency INEGI estimates and economists in a Reuters poll had predicted a 0.7% increase.

"The economy's performance will remain limited by the damage to confidence caused by U.S. protectionist policies and financial uncertainty," said Alfredo Coutino, director for Latin America at Moody's Analytics.

Coutino warned that investment decisions in the April-to-June period were already impacted by persistent domestic and external uncertainty.

Mexico's peso and stock exchange rallied early Friday amid a broad jump in Latin American stocks and currencies, after U.S. Federal Reserve Chair Jerome Powell hinted at a rate cut in September. Fed decisions are closely watched across the region.

Separate INEGI data released on Friday showed that headline inflation undershot market expectations in the first half of August and slowed down from the prior month.

Consumer prices were up 3.49% in the 12 months through mid-August, the statistics agency said, well below the 3.66% forecast by analysts polled by Reuters and compared with a 3.55% the prior month. Core inflation, however, remained sticky.

The country moved away from recession threats with GDP staying two consecutive quarters in positive territory, but its central bank faces the challenge of keeping inflation under control while fueling Mexico's economic growth.

"The economy continues to face significant risks and slight fragility," analysts at brokerage Monex said in a note.

Meanwhile inflation data supported prospects for further monetary easing as the annual rate remained within the central bank's target.

Minutes from the Bank of Mexico's latest monetary policy meeting showed that board members would consider additional rate cuts.

Banxico, as the central bank is known, targets an inflation rate of 3% plus or minus a percentage point. In August it cut its benchmark interest rate by 25 basis points to 7.75%, a smaller cut than previously implemented but that nevertheless brought the rate to its lowest level in three years.

Analysts expect the key rate to end 2025 at 7.50% and see inflation in Mexico reaching 3.9% by that time.