Bank of Mexico cuts growth forecast as inflation optimism is questioned

By Brendan O'Boyle

MEXICO CITY (Reuters) -The Bank of Mexico on Wednesday cut its growth forecast for Mexico's economy to near zero and raised its short-term inflation forecasts as Latin America's second-largest economy continues to reel from global trade uncertainty. In its third-quarter report, the central bank projected gross domestic product growth of just 0.3% this year, down from 0.6% in its previous forecast. The bank maintained its 1.1% growth forecast for 2026 and announced a 2.0% projection for 2027.

Banxico, as the central bank is known, attributed the downgraded growth forecast to the economy's worse-than-expected performance in the third quarter. Quarterly GDP contracted 0.3%, hit by slumping industrial production and weakening auto exports to the U.S. during President Donald Trump's trade war.

The bank's presentation of its quarterly report on Wednesday came during an internal debate about the wisdom of its monetary easing, fueled by Deputy Governor Jonathan Heath's comments last week that Banxico's inflation forecasts face a "credibility crisis."

The bank has cut its benchmark rate by four percentage points since early last year. On November 6, the board made its 11th consecutive cut, bringing the rate down 25 basis points to 7.25%, its lowest since May 2022.

In justifying the cuts, a majority of board members have cited falling headline inflation - now within one percentage point of the bank's 3% target - and continued economic weakness.

Annual headline inflation was 3.61% in the first half of November, while core inflation was 4.32%.

"Continuing with our cycle of cuts is consistent with the inflation outlook, with the even wider degree of slack that the national economy is showing," Banxico Governor Victoria Rodriguez said during a presentation of the bank's quarterly report.

The bank maintained its earlier projection that inflation will hit the 3% target by the second half of next year. But it slightly raised its forecasts for average annual core inflation for late 2025 and early 2026, as well as for general inflation in early 2026.

Heath, who has voted against cutting rates for four straight meetings, cast doubt on the reliability of the bank's long-term inflation forecast. At a conference of financial and business leaders last week, he questioned how the bank could achieve its target of 3% annual inflation by the third quarter of 2026, despite the elevated forecasts in the shorter term.

The bank's optimism contrasts with the median forecast of analysts polled by Citi this month, which projected headline and core inflation at the end of 2026 at a significantly higher 3.91% and 3.83% respectively.

Heath's fellow board members defended the credibility of their forecasts on Wednesday and said they were committed to the 3% goal.

"As for the credibility of forecasts, I would simply reiterate that each analyst has their own models and assumptions. In that context, it is normal and natural for discrepancies to arise," Deputy Governor Gabriel Cuadra said.

(Reporting by Brendan O'Boyle; Editing by Emily Green and David Gregorio)