Background on Banxico and Its Role
Banxico, or the Bank of Mexico, is the country’s central bank responsible for managing monetary policy to maintain price stability and support economic growth. Its decisions on interest rates significantly impact Mexico’s financial markets, inflation, and overall economic health.
Recent Interest Rate Decision
In the latest monetary policy announcement for 2025, Banxico’s Governing Board decided to lower the target rate for the overnight interbank interest rate by 25 basis points, bringing it down to 7%. This move was widely anticipated by the market following Citi’s survey.
Decision Details:
- The decision was made by a majority vote of 4 to 1, with Subgobernador Jonathan Heath again being the sole dissenter.
- This 25-basis-point reduction is the thirteenth adjustment since March 2024, cumulatively lowering the rate by 425 basis points from 11.25% to the current 7%.
- Out of these thirteen adjustments, eight have occurred in 2025, reducing the rate from 10% to its present level of 7%.
Banxico’s Communication and Fiscal Adjustments
In its statement, Banxico acknowledged the fiscal adjustments and their transient effect on prices. However, they noted that a comprehensive evaluation of their impact will require additional information as it becomes available.
The Governing Board emphasized that they deemed it appropriate to continue the cycle of interest rate reductions, aligning with their assessment of the current inflationary landscape. They considered factors such as exchange rate behavior, economic activity weakness, and potential impacts from global trade policy changes.
Prospective Guidance and Inflation Outlook
Banxico’s prospective guidance indicated a pause in further rate adjustments, as the Governing Board will evaluate the timing for additional rate changes while considering all inflation determinants.
- Analysts from Banco Base, BNP Paribas, and Pantheon Macroeconomics interpreted this guidance as a pause in the rate reduction cycle.
- Economists from these institutions, including Pamela Díaz Loubet from BNP Paribas and Andrés Abadía from Pantheon Macroeconomics, noted that while rate adjustments become less mechanical, the door remains open for further reductions.
Adjustments to Inflation Forecasts
Banxico revised its inflation and underlying inflation forecasts for the fourth quarter of 2025, as well as for the first and second quarters of 2026.
- The central bank now expects inflation to vary by 3.7% in the last quarter of 2025, up from the 3.3% projected in February – a revision made twice this year and once more in December.
- Forecasts for underlying inflation in the first and second quarters of 2026 have been increased three times this year.
Despite these adjustments, Banxico maintained its stance that inflation will reach the 3% target by the third quarter of the following year, as it has since December of the previous year.
Elevated Underlying Inflation Forecasts
Banxico raised its underlying inflation forecasts from the fourth quarter of 2025 through the second quarter of 2026, which has raised concerns given that underlying inflation typically signals future inflation trends.
- For the September-December 2025 period, Banxico now projects a 4.3% variation instead of the previously estimated 4.1%.
- They anticipate a 4% variation for the first quarter of 2026, up from the immediately preceding 3.8%.
- For the second quarter of 2026, they project an average of 3.4%, compared to the previous estimate of 3.3%.
Pamela Díaz, the economist for Mexico at BNP Paribas, explained that these changes in Banxico’s underlying inflation forecasts reflect the impact of unforeseen shocks, such as climate change-induced agricultural price fluctuations, exchange rate movements, energy costs, and wages.
