MEXICO – Banxico Minutes: a prolonged pause at 6.50%

Banxico published the minutes from the June 25 monetary policy meeting, where the Governing Board unanimously decided to keep the policy rate unchanged at 6.50%, reinforcing the signal that the easing cycle has ended and that the current level of restriction is appropriate to achieve inflation convergence. The discussion focused on the continued moderation of inflation, the favorable evolution of non-core prices, and the presence of economic slack.

The Board stressed that significant downside risks to growth remain, while the balance of risks for inflation continues to be skewed to the upside. In particular, members identified risks associated with global trade policies, geopolitical tensions, climate-related shocks, cost pressures, and potential peso depreciation.

A key message from the minutes is that the current monetary stance is viewed as sufficiently restrictive to address the inflation outlook. Board members assessed that, despite recent progress in inflation, prudence remains necessary given the persistence of core inflation. The discussion suggested an emphasis on maintaining restrictive conditions for an extended period rather than considering additional rate cuts in the near term.

Overall, in our view, the communication was more neutral-to-hawkish than in previous meetings, emphasizing that inflation risks remain tilted to the upside and that rates are likely to remain on hold for a prolonged period. Dovish elements include the recognition of persistent economic slack, lower headline inflation, and the expectation that inflation will continue converging toward the 3% target by 2Q27. However, the emphasis on inflation persistence, elevated inflation expectations, external risks, and the discussion surrounding the Fed rate differential suggest that the threshold for resuming easing remains high for now.

Our take: The minutes reinforce the view that the Board considers the 6.5% policy rate appropriate for current economic conditions and that a data-dependent approach will continue to prevail. As such, we believe the discussion is consistent with our baseline scenario of a 6.5% policy rate through end-2026, with rates likely remaining at that level throughout 2027.

A notable element in the minutes, absent from the policy statement, was the discussion regarding the Fed’s policy path and the Mexico-U.S. interest rate differential. Some members acknowledged that the Fed could resume tightening, at a time when the rate differential with Mexico is already relatively narrow. However, there was no clear consensus within the Board on whether such a scenario would constrain Banxico’s future policy actions, highlighting differing views on the importance of external monetary conditions for the domestic policy outlook.

Despite now expecting two Fed hikes this year, we continue to view a sharp peso depreciation as the main trigger for renewed rate hikes by Banxico. Moreover, in our view, the bias is still toward easing, but conditional on a more sustained improvement in core inflation, a stable peso, and continued weakness in economic activity.

The next monetary policy meeting is scheduled for August 6, with the corresponding minutes due on August 20.