Investing.com -- Bank of America maintains a neutral view on the Mexican peso, forecasting USD/MXN at 18.50 by year-end 2026 and 19.50 by end-2027, citing potential short-term pressure from broader emerging market foreign exchange movements and a potentially deeper monetary easing cycle than currently priced in.
The bank expects Mexico's economic growth to reach 1.5% in 2026 and 1.6% in 2027. The 2026 forecast aligns with consensus, while the 2027 projection sits 20 basis points below market expectations.
BofA projects inflation at 4.5% for 2026, which is 50 basis points above consensus, and 4% for 2027, 20 basis points higher than consensus estimates. The bank forecasts Mexico's policy rate to stand at 6% by end-2026 and remain at 6% through end-2027, representing 225 basis points below the market-implied rate of 8.25% for 2027.
Mexico's economy remains largely neutral to higher oil prices stemming from the Iran conflict, according to the bank. The country has been a net oil importer for several years, making elevated oil prices slightly negative for the trade balance and growth. However, the inflation impact remains limited as Mexico caps gasoline prices, with the government typically using additional oil revenues to finance the subsidy, resulting in minimal fiscal impact.
Headline and core inflation exceeded 4% in February 2026, driven by an increase in non-core components. BofA revised its forecasts to reflect higher global gasoline prices, assuming the government uses the excise tax to keep pump prices constant in real terms.
The bank expects Banxico to cut rates toward 6% by end-2026, delivering 25 basis point cuts every other meeting. However, with inflation back above 4% and tighter financial conditions, the timing of cuts faces risks. A strong peso and the Ministry of Finance's tendency to smooth gasoline price shocks support this outlook.
Economic activity showed weakness in January, with monthly GDP growth at -0.92% month-over-month seasonally adjusted, as all components declined. Additional weakness is likely in February and March given escalating violence and its impact on the spring break season. BofA's 2026 GDP growth forecast of 1.5% is supported by a stronger-than-expected end to 2025, potential upside from the FIFA World Cup, and a constructive US economic outlook.
BofA's medium-term Compass BEER model indicates the peso is overvalued by 15.8%, while its long-term Compass FX model shows overvaluation of 1.3%.
Risks to the bank's view include a hawkish Banxico, smooth USMCA renegotiation, and a weaker dollar. Key upcoming events include Banxico meetings on Thursday and May 7, along with USMCA renegotiation in the first half of 2026.