Banxico Unexpectedly Cuts Rates

Banxico kept its benchmark interest rate unchanged at 6.50% during its June 2026 meeting, in line with expectations. It was noted that the economy is expected to rebound in the second quarter, although significant downside risks to activity remain. Inflation continued to ease between April and mid-June, with headline inflation down from 4.45% to 3.55%, while core inflation eased from 4.26% to 4.12%. Banxico revised down its headline inflation forecasts for the second quarter due to softer non-core prices, while slightly raising its core inflation outlook through the end of 2026. Banxico maintained its projection for headline inflation to converge to the 3% target in the second quarter of 2027. Policymakers said the balance of risks remains tilted to the upside, citing trade disruptions, geopolitical tensions, persistent core inflation, climate-related shocks, and possible peso depreciation. Banxico signaled that it will likely be keeping the policy rate at its current level.

The Bank of Mexico lowered its benchmark interest rate by 25 basis points to 6.50% at its May 7, 2026 meeting, as expected, bringing it to its lowest level since April 2022 and likely marking the end of the easing cycle that began in March 2024. The decision was split, with three board members backing the cut while two favored holding rates unchanged. Banxico cited a contraction in Mexico’s economy during Q1 2026, saying weaker activity has created greater economic slack and reduced demand-driven inflation pressures. Inflation eased between mid-March and April, with headline inflation slowing from 4.63% to 4.45% and core inflation falling from 4.46% to 4.26%. Despite upward revisions to short-term inflation forecasts due to higher non-core prices, the central bank still expects inflation to converge to its 3% target in Q2 2027. Banxico said maintaining the policy rate at the current level will likely be appropriate going forward amid ongoing geopolitical and trade-related uncertainty.

The Bank of Mexico reduced its benchmark interest rate by 25 basis points to 6.75% in its March 26, 2026 meeting, unexpectedly resuming the easing cycle. This reduction follows the brief pause in rate cuts that occurred in February after the sequence of easing began in March last year. Mexico’s economic activity showed marked weakness in early 2026 after expanding in the previous quarter, and the Board warned that downside risks from trade tensions and global uncertainty continue to imply risks to the outlook. The decision to cut was taken by a majority of the Board, which judged a reduction appropriate given the current inflation panorama, the weakness in economic activity, and the degree of monetary restriction implemented. Headline inflation rose to 4.63% in mid-March from 3.77% in January, while core inflation remained practically unchanged at 4.46%, remaining above 4%. Despite these near-term pressures, Banxico still projects inflation will converge to its 3% target in Q2 2027.