Mexico’s core inflation rose 0.22% in May, undershooting the 0.24% consensus forecast. The print points to softer underlying price pressures over the month than markets had pencilled in.
The data focus on core inflation, which strips out volatile items and is closely watched for signals on the broader trend. The May outcome came in 0.02 percentage points below expectations, setting a lower reference point for assessing near-term inflation momentum.
Monetary Policy Implications and Market Reaction
With May core inflation coming in slightly below expectations, we see this as a clear signal that Banxico’s restrictive monetary policy is taking hold. This data point, combined with the year-over-year core inflation rate now at 4.10%, the lowest since late 2023, strengthens the case for a dovish pivot. We believe the central bank has no reason to consider further hikes and will now be looking for the opportune moment to begin an easing cycle.
The derivatives market is already reacting, and we anticipate the TIIE swap curve will continue to price in rate cuts more aggressively in the coming weeks. As of this morning, overnight swaps are pricing in a nearly 60% probability of a 25-basis-point cut by the September 2026 meeting, up from just 40% last week. We see value in receiving front-end swaps, positioning for the curve to flatten as the market fully prices in at least one cut before year-end.
Currency Outlook and Growth Context
For currency traders, this outlook suggests renewed pressure on the Mexican Peso. The prospect of narrowing interest rate differentials with the US dollar makes the peso less attractive for carry trades. We are therefore looking at buying USD/MXN call options with a three-month tenor, targeting a move back towards the 18.70 level last seen in the first quarter.
This inflation report doesn’t exist in a vacuum; it follows recent data showing Q1 GDP growth slowed to an annualized 1.8%. Historically, Banxico has shown a willingness to pivot once confident in the disinflationary trend, similar to its prolonged hold at over 11% in 2024 before finally cutting. The combination of softer inflation and sluggish growth gives them the cover they need to consider easing policy later this year.
