Banxico Cuts Rate to 6.50%, Signals Easing Cycle End

The Governing Board of Mexico's Central Bank (Banxico) lowered the interbank overnight interest rate by 25 basis points to 6.50% on Thursday. The decision marks the third monetary policy adjustment of 2026 and signals the conclusion of the easing cycle that began in March 2024. The measure was approved by a 3-2 majority vote with Subgovernors Galia Borja and Jonathan Heath voting to keep the rate unchanged at 6.75%.

In its official statement, the board said that the current inflationary environment allowed for a final adjustment to the benchmark rate. Since the beginning of the easing cycle, Banxico has reduced the rate by a cumulative 475 basis points across 15 meetings. More than 60% of those cuts took place during the 2025 fiscal year. The current cycle has been more aggressive than the previous easing period between 2019 and 2021, when rates were reduced by 400 basis points from a peak of 8.25%.

The main driver behind the monetary easing has been the cooling of the Mexican economy. Preliminary data from the National Institute of Statistics and Geography (INEGI) showed that Gross Domestic Product (GDP) contracted 0.8% during 1Q26. The decline followed four consecutive quarters of growth, increasing concerns over a prolonged period of economic weakness.

Private sector analysts have revised growth expectations downward in response to the data. Economists from Banco Base and Pantheon Macroeconomics estimate that if the 0.8% contraction is confirmed in INEGI’s final May reading, the economy could expand by only 1.0% to 1.2% in 2026. This would fall below Banxico’s previous 1.6% growth forecast issued in February.

Market performance following the announcement reflected cautious optimism. The S&P/BMV IPC index rose 0.24% to 70,019.45 points, while the Mexican peso posted slight gains against the US dollar. In energy markets, West Texas Intermediate crude remained elevated at US$84.81 per barrel. The indicators suggest that, although the easing cycle may have concluded, the path toward Banxico’s 3% inflation target remains exposed to domestic and international volatility.

Inflationary Revisions and Geopolitical Headwinds

Despite the rate cut, Banxico raised its short-term inflation forecasts for the third consecutive time. The projection for 2Q26 was revised upward from 4.0% to 4.1%, while the forecast for 3Q26 increased from 3.7% to 3.8%. The board continues to target 3.0% inflation but does not expect to reach that level until 2Q27.

Headline inflation stood at 4.45% in April, down from 4.63% in early March. However, core inflation remains a persistent concern for the central bank. Subgovernors Heath and Borja, who opposed the latest cut, cited risks related to long-term inflation expectations. Since the easing cycle began, Jonathan Heath has voted to hold rates steady 10 times, underscoring divisions within the board over the pace of monetary normalization.

Geopolitical tensions have also shaped the bank’s outlook, particularly disruptions linked to the Strait of Hormuz, which have intensified global economic uncertainty. Banxico noted that the duration and severity of these tensions could continue affecting international commodity prices. While advanced economies experienced inflationary pressure in March due to higher energy costs, Mexico has also seen volatility in domestic fuel prices.

In April, high-octane gasoline prices rose 6.16% month over month, significantly above the overall monthly inflation rate of 0.20%. LP gas also ranked among the products with the largest price increases. Banxico identified several upside risks to inflation, including trade-related disruptions, cost-push pressures, exchange-rate depreciation, and adverse weather conditions.