Our economic outlook for Mexico

Since our last update, the conflict in the Middle East has increased global risk aversion and contributed to higher commodity prices. While we have not changed our forecast, the conflict raises uncertainty about the economic outlook. Mexico’s exposure is mainly indirect, based on higher global energy costs—particularly related to refined petroleum products and natural gas—rather than direct supply links to the region. A prolonged conflict poses upside risks to inflation, downside risks to growth, and depreciation pressure on the peso.

On the economic activity front, Mexico entered 2026 recovering from cyclical challenges, with data for year-end 2025—such as GDP growth—showing an upswing. Data in early 2026, including industrial production, have since pointed to pockets of near‑term weakness, underscoring a still‑uneven recovery. We continue to expect GDP to 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 (USMCA) on trade will boost business and consumer sentiment, although it is likely to generate bouts of uncertainty. U.S. and Mexican authorities have already begun bilateral discussions ahead of the joint review, showing the willingness of the Mexican side to reassure investor confidence and lower policy uncertainty.

Though inflationary pressures remain uneven, we expect a gradual decline in inflation. Headline inflation has moved higher recently—driven largely by non‑core components—while core inflation has remained broadly stable, consistent with our year‑end 2026 core inflation forecast of 3.9%. 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.

On the monetary policy front, the Bank of Mexico (Banxico) is in an easing cycle that should bring the policy rate to 6.5% by year‑end, supporting credit‑sensitive sectors and household consumption. After holding rates steady in early February, Banxico lowered the overnight interbank rate by 25 basis points to 6.75% in late March, 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 rather than aggressive.

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 about the same level seen in the past month.