Our economic outlook for Mexico

We continue to expect Mexico’s economic outlook to improve in 2027, supported by a solid U.S. economy. However, the external environment has become more challenging, with rising U.S. interest rates contributing to tighter global financial conditions and a stronger dollar. Geopolitical tensions and elevated commodity prices add further uncertainty, creating downside risks to growth and upside risks to inflation.

Demand from the U.S. should continue to support Mexico’s economy, particularly through export-related manufacturing. Recent data remain consistent with an uneven recovery: AI-related exports and capital goods imports continue to support economic activity, but growth appears to have moderated in the third quarter and consumption remains subdued.

Trade policy uncertainty also remains a meaningful headwind. The United States-Mexico-Canada Agreement remains in force, but negotiations over a long-term extension are proceeding slowly. Mexico is seeking relief from U.S. tariffs on autos, steel, and aluminum, while the U.S. is pressing for tighter rules of origin and restrictions on non-North American inputs. Progress toward a partial tariff agreement could provide some near-term relief, but continued uncertainty over the broader agreement is weighing on investment planning and business confidence.

Inflation has continued to moderate broadly in line with our expectations. Headline inflation rose to 3.5% year over year in September, driven by noncore prices, but is well below its 2026 peak of 4.6%. Core inflation declined to 3.8% year over year in September. We continue to expect disinflation to proceed gradually. Economic slack and moderating underlying price pressures should support further progress, but services inflation remains elevated and risks from food prices, trade disruptions, and geopolitical developments remain tilted to the upside.

The Bank of Mexico (Banxico) unanimously kept its policy rate unchanged at 6.5% in September. Policymakers are caught between rising U.S. interest rates, which call for tighter policy, and economic slack in Mexico, which argues for softer policy. Additionally, moderating core inflation reduces the need for a rate increase, but elevated services inflation and risks to the peso and food prices argue against easing. While Banxico has emphasized that it does not need to follow the steps of the Federal Reserve, we expect these competing forces to keep policy on hold for now. We maintain our forecast that the policy rate will remain at 6.5% through 2027.