After a year of steady monetary easing, Mexico’s central bank appears to be approaching a turning point. In its final policy meeting of 2025, Banco de México (Banxico) cut its benchmark interest rate by 25 basis points to 7.0%, capping a cumulative 300 basis points in reductions over the year. Yet despite this continued loosening, the tone of Banxico’s latest statement suggests a growing reluctance to extend the cycle further. The bank’s forward guidance now emphasizes evaluating the timing of future adjustments, rather than signaling additional cuts outright.
This shift comes amid persistent inflationary pressures, particularly in the services sector. While headline inflation decelerated to 3.72% and core inflation to 4.34% in mid-December—both below previous readings—services inflation accelerated to a five-month high. This stickiness in core components complicates the disinflation path and raises questions about how much further monetary policy can support growth without risking price stability.
Banxico’s updated forecasts reflect this tension. Inflation projections for late 2025 and the first half of 2026 were revised slightly upward, largely due to slower-than-expected declines in services inflation. Nevertheless, the central bank still expects headline inflation to converge to its 3% target by the third quarter of 2026. However, this forecast notably excludes the impact of new excise taxes (IEPS) and import tariffs set to take effect in 2026—fiscal measures that could structurally lift prices, even if their effects are not broad-based or persistent.
Banxico’s neutral policy rate offers little cushion against inflation risks from upcoming fiscal changes and persistent service-sector pressures.
The exclusion of these tax and tariff changes from current projections introduces an element of uncertainty. While Banxico has indicated it will update its forecasts once more information is available, it acknowledges that these measures are likely to place inflation on a higher base level. This complicates the central bank’s task, particularly as its policy rate now sits in what it considers a neutral range. With core inflation still above target and external price shocks looming, the risk of missing the inflation objective remains tangible.
Market participants increasingly expect Banxico to hold rates steady at its next meeting in February 2026, with any further action contingent on evolving inflation dynamics and external conditions. The stance of the U.S. Federal Reserve may offer some room for maneuver, especially if it leans dovish. However, domestic inflation remains the primary constraint. The strength of the peso and subdued domestic demand have helped contain price pressures, but they are insufficient to guarantee convergence to target without credible monetary restraint.
The divergence between Banxico’s cautious tone and more optimistic market expectations underscores a broader uncertainty over policy direction. While some observers interpret the central bank’s guidance as a signal of imminent pause, others see room for further easing should inflation data surprise to the downside. This ambiguity reflects a deeper challenge: balancing the need to anchor inflation expectations with pressures to support an economy still navigating weak demand and external volatility.
