Our economic outlook for Mexico

Mexico enters 2026 recovering from cyclical challenges and facing longer-term economic opportunities. Recent data for year-end 2025, such as GDP growth and retail sales, show that an upswing is taking hold. Indeed, we expect GDP to rebound in 2026, supported by strong demand from the U.S. and a resilient labor market. Recent trade data also support our view that nearshoring trends continue to strengthen Mexico’s role as a North American manufacturing hub, supported by competitive labor costs, geographic proximity, and deep integration with U.S. industry.

We expect 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. The U.S. implemented tariff policy changes following a recent U.S. Supreme Court ruling, but goods covered by the USMCA remain exempt.

While inflationary pressures remain uneven, we expect a gradual decline in inflation. Core inflation has increased in recent months, reaching 4.5% in January, reflecting lingering cost pressures that include new taxes and tariffs in select categories and rebounding domestic consumption. This continued strength has led us to nudge up our year-end 2026 core inflation forecast to 3.9%, but contained real wage growth, stable long-run inflation expectations, and the past appreciation of the peso should help push inflation lower than it stands now. We are monitoring the oil market and events in the Middle East for their potential to push inflation higher.

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. With disinflation proceeding only gradually, the approach to cuts remains cautious rather than aggressive. Banxico maintained the policy overnight interbank rate at 7% in early February, signaling a data‑dependent approach to normalization.

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 would be weaker than current levels but stronger than its levels for much of 2025.