Introduction to the Mexican Cash Demand Situation
José Manuel Xirinachs, the Executive Secretary of the Economic Commission for Latin America and the Caribbean (CEPAL), acknowledged that a significant portion of Mexicans participating in the informal sector drives intense cash usage, which is less responsive to interest rates.
Interest Rates and Credit Usage in Developed Countries
In countries like the United States, China, and Japan, interest rate positions can either encourage more credit usage and consumption-boosting resources during expansionary phases or limit them when the interest rate is restrictive or high.
Mexico’s Cash Demand and Interest Rates
Xirinachs explained that Mexico’s cash demand is insensitive to interest rates. High-interest rates should theoretically discourage holding cash, but in practice, much of Mexico’s cash does not compete with financial instruments (Cetes, bills, funds, etc.).
Monetary Base and Circulating Money
According to Banco de México data, cash (bills and coins) along with current account bank deposits reached 3,034,652.452 Mexican pesos by December 11, 2025.
- This monetary base circulation level is 7.8% higher than the previous year’s demand during the same period.
- It is the highest recorded value in this monetary aggregate so far this year.
- Its annual increase is more than double the inflation variation registered in November, which was 3.80% annually.
Weak Interest Rate Channel
Xirinachs pointed out that those operating predominantly in cash lack access, trust, or incentives to move towards banking instruments. Thus, the interest rate substitution channel is weak.
Remittances and Exchange Rate Stability
A significant portion of remittances arriving in Mexico quickly turns into cash, further fueling the demand for it.
Post-COVID-19 pandemic, a precautionary demand has emerged, leading to increased household and small business preferences for having available cash.
The stability of the Mexican peso’s exchange rate against the US dollar, along with recent appreciation, has also contributed to cash demand.
The recent interest rate flexibility supports but does not initiate the phenomenon; it passively responds to public demand. The cash growth does not imply a loose monetary stance as long as credit does not accelerate, expectations remain unanchored, and inflation does not rise.
Banxico’s Arguments
Banco de México data shows that the funding rate has increased, on average, by 8.6% annually, explained only twice by the central bank.
- April 16: An increase in demand reflecting part of the seasonal effect associated with Easter and Holy Week.
- November 14: The demand for cash was linked to the “Buen Fin” consumption discount program and the seasonal effect of November 20’s holiday.
“As long as informality does not structurally decrease, cash demand will remain high,” Xirinachs concluded.
