Banxico Hits Pause and Holds the Policy Rate at 7%: Inflation, the Exchange Rate, and Weak Growth Set the Tone for 2026
Banco de México (Banxico) decided to keep its benchmark interest rate unchanged at 7% in a unanimous vote, confirming a shift toward caution after the extended rate-cutting cycle that began in 2024. The decision, widely expected by analysts, comes at a time when disinflation is continuing but facing short-term “noise” stemming from fiscal adjustments and an economic recovery that still hasn’t fully gained traction.
The central bank justified the pause as necessary to keep assessing the inflation outlook and the impact of tax changes implemented at the start of the year, particularly on goods subject to the IEPS excise tax. In its projections, Banxico pushed back the timeline for inflation to converge to the 3% target and reinforced the message that the path of monetary policy will be data-dependent—tracking core inflation, expectations, slack conditions, and the balance of risks, including exchange-rate behavior.
The pause comes after 12 consecutive cuts that brought the rate down from around 11% (at the start of the cycle) to today’s 7%, reflecting the progress inflation has made from its 2022–2023 peaks. Still, the recent uptick in inflation in the first half of January—linked to tax updates—was a reminder that disinflation is not linear and that certain shocks can distort the near-term picture, even if they are typically viewed as one-off effects.
In markets, the conversation has shifted from “how much to cut” to “when to resume” and “at what pace.” Surveys of financial institutions suggest the central bank could still make additional adjustments later in the year, but the room to cut looks more limited if inflation stays above target or if expectations worsen. In addition, the rate differential versus the United States—key for portfolio flows into local debt—will remain a factor Banxico and investors watch closely, especially if the Federal Reserve keeps a restrictive stance for longer than expected.
The exchange rate is another core piece of the puzzle. A relatively firm peso helps contain pressure on imported goods, but it also makes the market more sensitive to bouts of global risk aversion, volatility driven by U.S. economic data, and geopolitical events that shift appetite for emerging-market assets. For Mexico, this financial channel exists alongside domestic factors: the trajectory of public finances, the pace of private investment, and the performance of export sectors tied to the U.S. economy.
On the real-economy side, Banxico acknowledged weakness in activity. In recent quarters, growth has been constrained by softer consumption, still-restrictive financial conditions, and investment that—while supported by reshoring (“nearshoring”)—faces bottlenecks such as energy infrastructure, water availability, logistics, and regulatory certainty. In this context, a 7% policy rate keeps monetary policy restrictive, but it gradually reduces the financial burden on households and businesses compared with the 2023–2024 highs.
Looking ahead, the central bank is also watching specific risks in services, such as seasonal demand rebounds in tourism and entertainment, as well as climate-related pressure on agricultural prices. While some analysts expect a temporary increase in certain services during the summer—driven by international events that boost hotel occupancy and away-from-home spending—the key question is whether those increases feed into core inflation or remain temporary and reversible moves.
For credit, the signal is mixed: holding the rate interrupts the momentum of cheaper borrowing costs, but a 7% level is still lower than what prevailed during the most restrictive phase of the cycle. This matters for mortgages, consumer credit, and business financing, where rate pass-through tends to be gradual. For public finances, a more stable borrowing cost can add some predictability, although the current level of rates still implies a meaningful bill for debt service in an environment where fiscal space is tighter.
Overall, Banxico’s pause is a reminder that the last mile back to 3% is usually the hardest: inflation is easing, but not at the same pace across all components, while the economy slows without collapsing and the external environment remains highly uncertain. The central bank appears to be aiming to preserve credibility and flexibility—wait for data, avoid premature signals, and resume cuts only if the inflation trajectory confirms progress is sustainable.
Final note: with the policy rate at 7%, Banxico is prioritizing prudence in the face of fiscal shocks and an external backdrop dominated by the U.S., even as the market continues to price in gradual cuts. The tradeoff between still-sensitive inflation and weak growth will be the deciding factor in whether this pause is brief or the start of a longer stretch of monetary stability.
