Banxico Maintains Hawkish Bias on Inflation and Sparks Internal Debate Over Pace of Rate Cuts
Members of the Bank of Mexico’s Governing Board warned that the balance of risks for inflation remains tilted to the upside, with a particular focus on the persistence of services inflation. According to the latest monetary policy minutes, there were differing views on how quickly services inflation might ease: while some see room for moderation amid slower economic momentum, others highlight that the stickiness of certain components—particularly those linked to food consumed outside the home—limits the scope for relief.
In its latest decision, the central bank lowered the benchmark interest rate by 25 basis points to 7.25%, its lowest level since May 2022. Even so, core inflation—which excludes the most volatile prices—stood at 4.28% year-over-year in October, above the target of 3% ±1 percentage point. Against this backdrop, markets are speculating about the possibility of another cut in December, though the internal discussion reflects caution about easing financial conditions too soon, before price declines become more entrenched.
Deputy Governor Jonathan Heath voted to keep the rate at 7.5%, arguing that core inflation is still above levels consistent with the target. In his view, premature easing could signal complacency and unanchor expectations, in addition to having regressive effects on lower-income households, who are hit harder by price spikes. Heath reiterated that the goal is not just to stay within the variability range but to consistently converge to the 3% target.
Among the risks identified, the Board noted the impact of the IEPS tax adjustment on sugary beverages. Some members viewed this as a one-off effect on the food category, while others called for close monitoring of possible indirect effects that might spill over into core inflation. The Board also mentioned the possibility of pressures on goods stemming from rising goods inflation in the United States due to shifts in trade policy, along with the impact of another minimum wage increase on costs and prices. In the short term, the seasonality at the start of the year—the so-called “January effect”—could accentuate transitory pressures on some services.
The domestic backdrop adds more nuance: private consumption has remained relatively resilient, buoyed by formal employment and wage increases, while investment tied to nearshoring continues to support nonresidential construction and demand for logistics services. However, recent exchange rate volatility and slow normalization of some supply chains could eventually feed through to prices. The management of public tariffs and energy prices, along with the exchange rate’s trajectory, will remain key factors to monitor when assessing how fast inflation might converge.
Looking ahead, the bank’s guidance is cautious: the cutting cycle is expected to be gradual and data-dependent, subject to confirmation of a disinflationary trend in services, developments in total wage income, and continued declines in 1- and 3-year inflation expectations. The Federal Reserve’s stance and overall global financial conditions will also influence Banxico’s room to maneuver, in a context where credibility of the nominal anchor remains the central asset of monetary policy.
For households and businesses, the message is mixed. A lower benchmark rate, if maintained, could gradually reduce the cost of consumer and mortgage credit, and ease working capital financing, especially for small and mid-sized businesses. However, a rapid rate cut while inflation is still persistent could risk reigniting price pressures, delaying convergence to the target and ultimately raising the cost of adjustment.
In summary, Banxico acknowledges progress in reducing inflation but emphasizes that the “tough part”—services—remains unresolved. The combination of specific fiscal effects, wage increases, external environment, and seasonality suggests that future rate cuts will remain prudent and conditional. The key will be to keep expectations anchored while the economy slows in an orderly fashion and without sacrificing attainment of the 3% medium-term target.
