Banxico Hints at Pause in Easing Cycle, Holding at 7.0%

The Governing Board of Mexico’s Central Bank (Banxico) closed 2025 with its benchmark interest rate at 7.00%, as announced on Dec. 18, continuing a monetary easing cycle amid slowing economic activity and easing inflationary pressures. However, policymakers signaled they will assess a potential pause in further rate cuts.

The decision was supported by Governor Victoria Rodríguez Ceja and Deputy Governors Galia Borja Gómez, José Gabriel Cuadra García, and Omar Mejía Castelazo. Deputy Governor Jonathan Ernest Heath Constable cast the sole dissenting vote, favoring keeping the rate at 7.25% to address what he described as “persistent” inflationary pressures.

Economic Stagnation and Slack Conditions

The board’s decision comes as Mexico faces mounting signs of economic weakness. Preliminary data for 4Q25 point to continued fragility following a 0.29% contraction in gross domestic product (GDP) in the third quarter. Board members noted that full-year GDP growth for 2025 is projected at just 0.3%, down sharply from 1.4% in 2024.

Several members highlighted a widening negative output gap, indicating the economy is operating below its potential. 

• Manufacturing: Industrial production remains on a downward trend, particularly in the automotive sector, which has struggled with low output of both heavy and light vehicles.

• Investment: Fixed investment continues to decline, reflecting weaker public and private spending on construction and machinery.

• Consumption: While private consumption is still expanding, growth is increasingly driven by imported goods—possibly supported by the peso’s appreciation—while domestic services activity has decelerated.

Consumer confidence data compiled by INEGI and Banxico showed that four of the five main components of the Consumer Confidence Index (CCI) posted annual declines. The sharpest deterioration was in perceptions of the country’s future economic outlook. Expectations for the national economic situation one year ahead fell 6.9 points compared with December 2024, while perceptions of the current situation versus 12 months earlier dropped by 4.3 points.

Inflationary Pressures and "One-Off" Shocks

Mexico’s annual headline inflation rose from 3.63% in mid-October to 3.80% in November. Board members attributed  the increase mainly to base effects and specific “one-off” adjustments rather than broad-based price pressures. Core inflation, which excludes volatile food and energy prices, also edged higher, reaching 4.43% in November.

The board discussed several factors expected to affect prices in early 2026, including a 13% increase in the minimum wage, new tariffs, and adjustments to the Special Tax on Production and Services (IEPS). Most members characterized these measures as “transitory shocks” unlikely to generate second-round effects on the inflation process.

"The policy must distinguish between transitory shocks and persistent inflationary pressures," one member noted, pointing out that past tax increases on sugary drinks had only a limited and temporary impact on broader inflation.

Analysts at institutions including Banamex, Pantheon Macroeconomics, and Goldman Sachs said the discussion reinforces expectations of a pause in the next two policy meetings, scheduled for Feb. 5 and March 26, 2026. According to these forecasts, rate cuts could resume in May, once early-year uncertainty subsides.

Currency Appreciation and Global Context

The Mexican peso showed notable strength in late 2025, trading in a range of MX$17.93 to MX$18.77 per US dollar. The appreciation was supported by a broadly weaker US dollar, solid domestic fundamentals, and a favorable interest-rate differential relative to other emerging markets.

The board also noted that the US Federal Reserve recently cut its benchmark rate by 25 basis points for a third consecutive meeting. This global shift toward monetary easing has given Banxico room to lower rates without triggering significant capital outflows or sharply narrowing the risk-adjusted yield differential.

Nevertheless, policymakers warned that risks persist. Uncertainty surrounding US trade policy and the potential for abrupt corrections in global equity markets—particularly in the technology sector—continue to cloud the international outlook.

The Path to 2026

The Governing Board  reiterated its commitment to achieving the 3% inflation target by 3Q26. While most members signaled that further rate cuts may be  warranted, they emphasized an “approach of caution and gradualism.”

In his dissent, Deputy Governor Heath questioned the credibility of the bank’s current projections, arguing that core inflation has trended upward for much of 2025 and that rate cuts should be paused until there is clearer evidence the 3% target is within reach.

“We must carefully assess the time required to reverse the upward trend shown by core inflation this year,” Heath wrote.

Despite internal differences, the board reaffirmed its mandate to preserve low and stable inflation, while closely monitoring a cooling labor market. Mexico’s unemployment rate rose to 4.6% in November, its highest level since late 2021.