Bank of America maintains a neutral outlook for the Mexican peso, projecting USD/MXN at 18.50 by year-end 2026 and 19.50 by the end of 2027. The bank said the currency could face near-term downward pressure from swings in emerging market foreign exchange markets and from a monetary easing cycle that may prove deeper than market pricing implies.
On the macro front, BofA expects Mexican economic growth of 1.5% in 2026 and 1.6% in 2027. The 2026 growth projection aligns with consensus, while the bank's 2027 estimate is 20 basis points below market expectations.
Inflation assumptions from the bank are above consensus. BofA forecasts headline inflation at 4.5% for 2026, which it notes is 50 basis points higher than market consensus, and at 4.0% for 2027, 20 basis points above consensus. In the bank's view, Mexico's policy rate should be at 6.0% by the end of 2026 and remain at that level through the end of 2027. That policy-rate path sits 225 basis points below the market-implied rate of 8.25% for 2027.
BofA describes Mexico's exposure to higher oil prices - stemming from the Iran conflict - as largely neutral to slightly negative. The bank points out that Mexico has been a net oil importer in recent years, so elevated crude prices weigh modestly on the trade balance and on growth. The inflationary impact is limited in their view because gasoline prices are capped domestically; the government typically channels additional oil revenues to finance the subsidy, which results in minimal fiscal strain.
Headline and core inflation rose above 4% in February 2026, according to the bank, driven by a pickup in non-core components. In response, BofA revised its forecasts to account for higher global gasoline prices, working on the assumption that authorities will use the excise tax to hold pump prices stable in real terms.
On monetary policy, BofA expects Banco de Mexico to move rates down toward 6.0% by the end of 2026, delivered as 25 basis point cuts every other meeting. That pacing, the bank warns, is exposed to downside risks on timing given that inflation has returned above 4% and financial conditions are tighter. Two factors the bank cites as supportive of its easing path are a strong peso and the Finance Ministry's historical tendency to smooth gasoline-price shocks.
Recent economic activity flashed weakness in January, with monthly GDP contracting by 0.92% month-over-month on a seasonally adjusted basis as all components declined. BofA expects further softness in February and March, citing escalating violence and its adverse effect on the spring break season. Nonetheless, the bank's 2026 growth call of 1.5% is underpinned by a stronger-than-expected finish to 2025, potential upside from the FIFA World Cup, and what it describes as a constructive outlook for the US economy.
Valuation models from BofA suggest the peso may be overvalued. Its medium-term Compass BEER model indicates an overvaluation of 15.8%, while the long-term Compass FX model shows a more modest overvaluation of 1.3%.
BofA notes several risks to its baseline view, including a more hawkish-than-expected stance from Banxico, a smoother-than-anticipated renegotiation of the US-Mexico-Canada Agreement, and a weaker US dollar. The bank highlights upcoming dates to watch, naming Banxico meetings scheduled for Thursday and May 7, and the USMCA renegotiation expected in the first half of 2026.
Key takeaways:
- BofA keeps a neutral call on the peso with USD/MXN targets of 18.50 (end-2026) and 19.50 (end-2027).
- The bank projects slower monetary tightening than the market currently prices, forecasting a 6.0% policy rate through end-2027 versus a market-implied 8.25%.
- Higher oil prices are judged to have limited inflationary and fiscal impact because of capped gasoline prices and government smoothing of subsidies.
Impacted sectors: Financial markets and foreign exchange markets, energy and trade balance considerations, and sectors sensitive to domestic consumer prices such as transportation and retail.
Risks and uncertainties:
- A hawkish surprise from Banco de Mexico could keep rates elevated longer - affecting bond markets, banking sector margins, and FX dynamics.
- A smoother-than-expected USMCA renegotiation or a weaker US dollar could alter trade and currency dynamics and lessen near-term pressure on the peso.
- Persistent inflation above 4% or tighter financial conditions could delay the timing of rate cuts and change the projected FX path.
Bank of America's assessment presents a measured view of Mexico's near-term outlook: the peso faces potential short-term headwinds driven by external FX moves and the possibility of a deeper easing cycle than markets expect, even as domestic mechanisms limit the fiscal and inflationary fallout from higher oil prices.