Introduction to Mexico’s Monetary Policy
Mexico’s central bank policymakers have signalled a more cautious approach to interest rate cuts in 2026, citing trade uncertainty and new tariffs. The minutes of the bank’s December monetary policy meeting revealed that the board is likely to pause its rate easing cycle, which began in 2024.
The Rate Easing Cycle
The rate easing cycle, which started in 2024, continued in December with a 25 basis point cut to 7.00%, the lowest level since April 2022. The December rate decision was 4-1, with Deputy Governor Jonathan Heath voting to hold. The board’s majority argued that the quarter-point rate cut was justified by recent progress on inflation, a weak economy, and a strong peso.
Factors Influencing the Decision
However, the board flagged several factors that merited a more cautious outlook in future decisions. These include new taxes and tariff increases on imports, which a majority of governors believe are likely to push up prices in 2026. Mexico enacted tariff hikes of up to 50% on imports from China and several other Asian countries, with which it does not have a trade agreement. Lawmakers also approved a slate of new special taxes on certain products, such as soda, cigarettes, and video games.
Impact of Taxes and Tariffs
The minutes point to a wait-and-see approach, with analysts expecting a rebound in inflation in the first quarter due to the new taxes and tariffs, as well as Mexico’s 13% increase in the minimum wage for 2026. The governors mostly see the possible inflationary effects from the taxes and tariffs as temporary, but urged caution in case they lasted longer.
Inflation Concerns
The closely watched core index, which strips out volatile products, has been outside the central bank’s target range since May, rising for much of 2025. It ticked down to 4.33% in December but still remains above target. Banxico targets inflation at 3%, with a tolerance range of plus or minus one percentage point. Annual headline inflation in 2025 came in at 3.69%, below economists’ forecasts.
Future Outlook
Analysts have largely anticipated the board to pause rate cuts at some point in the first half of the year, after interpreting changes in the December meeting’s future guidance as signalling a shift. The board’s most hawkish governor, Heath, advocated keeping rates steady for an unspecified period to figure out how to bring down core inflation and prevent an uptick in headline inflation.
Conclusion
In conclusion, Mexico’s central bank is taking a cautious approach to interest rate cuts in 2026, citing trade uncertainty and new tariffs. The board is likely to pause its rate easing cycle, which began in 2024, due to concerns over inflation and the impact of new taxes and tariffs. With the core index still above target and annual headline inflation at 3.69%, the bank will need to carefully consider its next move to ensure that inflation remains under control.
