Our economic outlook for Mexico

The conflict in the Middle East has elevated both commodity prices and uncertainty about the economic outlook. Mexico’s exposure is mainly indirect, operating through higher global energy costs—particularly refined petroleum products and natural gas—rather than direct supply links to the region. Still, we have revised our GDP growth forecast downward and our inflation forecast upward. A prolonged conflict would pose further upside risks to inflation, downside risks to growth, and depreciation pressure on the peso.

GDP contracted by 0.8% in the first quarter on the back of disappointing services and industry sectors. Household consumption, an important driver of growth last year, has shown less momentum, as have some high-frequency indicators for the second quarter. We continue to expect GDP to post a modest rebound in 2026, supported by solid demand from the U.S. and a resilient labor market.

We anticipate that the midyear review of the United States-Mexico-Canada Agreement on trade will influence sentiment, though negotiations may generate bouts of volatility. Recent U.S.-Mexico engagement has advanced into a bilateral negotiating track—with an agreed-upon first official negotiating round during the week of May 25—including discussions on rules of origin, economic security, and critical minerals.

Although inflationary pressures remain uneven, we expect a gradual decline in the pace of inflation. Headline inflation has moved higher recently, driven largely by non‑core components. Given the recent developments in global energy markets, we have raised our year‑end 2026 core inflation forecast to 4.1%. Contained real wage growth, stable long-run inflation expectations, and the past appreciation of the peso should help push inflation lower over time, although higher energy prices remain an upside risk.

After making a 25-basis-point cut to the overnight interbank rate in late March, the Bank of Mexico lowered the rate by 25 basis points again on May 7—to 6.5%—citing near‑term economic weakness and the evolving inflation outlook. (A basis point is one-hundredth of a percentage point.) As disinflation is proceeding only gradually, the approach to further cuts remains cautious.

With the U.S.-Mexico policy rate gap expected to remain relatively stable and the peso’s growing role in global carry-trade dynamics, we anticipate the peso ending 2026 with an exchange rate between 17.5 and 18.5 against the U.S. dollar, which is slightly above the level seen for most of the past month.