The Bank of Mexico paused its rate-cutting cycle and kept the reference rate at 7.0 percent in its first monetary policy meeting of the year. It also revised its inflation expectations, delaying convergence to the 3.0 percent target until the second quarter of 2027. Analysts note a cautious stance amid fiscal impacts and upside risks.
The Board of Governors of the Bank of Mexico (Banxico) unanimously decided on February 6, 2026, to keep the reference interest rate at 7.0 percent, pausing the previous rate-cutting cycle. This move was anticipated by markets, given the need to assess the impact of fiscal changes such as the IEPS increase on sugary drinks, tobacco, and alcohol, along with the exchange rate and economic weakness.
Banxico raised its projections for general and underlying inflation over five quarters, factoring in fiscal adjustment effects, though it noted more data is needed for a full analysis. It now expects general inflation to end this year at 3.5 percent, up from 3.0 percent previously, and underlying at 3.4 percent. Convergence to the 3.0 percent target was delayed from the third quarter of 2026 to the second quarter of 2027, reflecting a more gradual decline in services inflation.
The central bank reaffirmed that the cutting cycle is not over, but future adjustments will depend on inflation drivers like cost pressures, peso depreciation, geopolitical conflicts, and climate impacts. The risk balance is more even, but with an upward bias, particularly as underlying inflation has stayed above 4 percent for 16 fortnights.
Analysts praised the pause as appropriate for maintaining credibility. Julio Ruíz from Citi Mexico called the communiqué's tone 'dovish,' hinting at additional cuts in March if inflation spikes prove temporary. Carlos Serrano from BBVA Mexico anticipates two more cuts this year, ending at 6.5 percent, provided they do not affect inflation expectations. Others, like Paulina Anciola and Iván Arias from Banamex, foresee another pause in March and cuts in May, while Liam Peach from Capital Economics sees room to lower to 6.25 percent.
This decision aligns with the Federal Reserve's pause in the United States, underscoring monetary policy interconnections. Banxico stressed its commitment to a low and stable inflation environment.
