Mexican Peso declines after IMF revises down growth

The Mexican Peso is taking another step lower after the IMF downgraded its growth forecasts for Mexico over the next two years on Tuesday. It reduced its 2024 forecast to 2.4% from 2.7% and 1.4% in 2025 from 1.5% previously estimated. 

“The forecast for Mexico is revised downward on account of weaker-than-expected outcomes for end-2023 and early 2024, with a contraction in manufacturing,” the IMF said in its latest World Economic Outlook report.

This follows similar downgrades from the Banxico in February, when it reduced its growth forecast to 2.8% from 3.0% in 2024, as per The Wall Street Journal. 

The fall off in growth is anticipated as a result of lower government spending in an effort to bring down the budget deficit. 

“Mexico’s Ministry of Finance expects the fiscal deficit to decrease from 5% to 2.5% of the Gross Domestic Product (GDP) next year, which would imply a cut in spending of 833.6 billion Pesos, according to the Pre-General Policy Criteria Economic 2025,” says Christian Borjon Valencia, Editor at FXStreet.com

In its March meeting, the Banxico reduced interest rates from 11.25% to 11.00% due to evidence of lower inflation and growth. However, the move failed to completely reverse the Mexican Peso’s long-term uptrend. 

Higher inflation in the US and recent comments from Fed Chairman Powell, however, may have reversed the trend for the Peso – in particular against the US Dollar. 

On Tuesday, Powell said, “Recent data shows a lack of further progress on inflation this year,” adding, “If higher inflation persists the Fed can maintain current rate as long as needed.” 

Higher interest rates tend to be positive for a currency as they increase foreign capital inflows. The opposite is true for lower interest rates. Given the divergence in the two country’s monetary policy stances, with Banxico cutting and the Fed holding, the Mexican Peso’s long-term appreciation versus the Buck looks at risk of breaking down