MEXICO – Banxico Minutes: final cut delivered, policy turns data-dependent

Banxico published the minutes from the May 7 monetary policy meeting, where the board cut the policy rate by 25 bps to 6.50% in a split decision, while signaling the end of the easing cycle. The central theme in the discussion was the balance between persistent inflationary pressures and increasing economic slack. Board members acknowledged that inflation has continued to decline but remains above target, with core components—particularly services—showing persistence. At the same time, they highlighted that recent shocks, particularly in non-core items, are largely supply-driven and expected to be transitory, with no clear evidence of second-round effects.

In parallel, the board emphasized that economic activity has weakened, suggesting a widening output gap that should help contain demand-driven inflation pressures. However, members also noted that the balance of risks for inflation remains biased to the upside, reflecting uncertainty linked to external factors.

Dissenting members emphasized the persistence of core inflation as a key source of concern, noting that underlying price dynamics—particularly in services—remain sticky. Deputy Governor Borja argued that cutting the policy rate at this juncture could complicate the inflation convergence process, suggesting that maintaining the current level of restriction would allow for a clearer assessment of the inflation outlook and its underlying drivers. In turn, Deputy Governor Heath leaned toward a prolonged pause, stressing the need to verify the persistence of inflationary shocks and ensure that inflation expectations are firmly anchored toward the 3% target before considering further easing.

Overall, despite hawkish elements in the minutes such as a divided vote, continued emphasis on persistent core inflation, an upward bias in the balance of inflation risks, and the dissenters’ concern about credibility and signaling effects of further easing, the communication suggests a dovish stance, as Banxico delivered an additional cut despite persistent inflation pressures. Dovish elements include the view that recent inflation shocks are transitory and supply-driven, recognition of weakening economic activity and increased slack, and the assessment that the current level of the policy rate is sufficiently restrictive, even after the cut.

Our take: The minutes reinforce the idea that the rate cut was the end of the cycle, with the discussion increasingly centered on the appropriateness of maintaining the current stance ahead, indicating a shift toward a fully data-dependent approach. We believe the minutes' remarks are consistent with our baseline scenario of 6.5% in 2026, with rates likely to remain at that level through 2027. Additionally, in our view, efforts are being made to improve communication. Evidence of this is that the Governor flagged the latest cut ahead of the meeting. As such, we would expect that pattern to be repeated before any further move. The next quarterly inflation report will be published on May 27. We expect a downward revision to 2026 GDP closer to 1% (from levels nearer 2%), which could affect the output gap estimate and be interpreted as reopening the door to a new easing cycle.