Banxico Keeps Benchmark Rate at 7% as Core Inflation Stays Elevated

Mexico's central bank left its policy rate unchanged at 7%, temporarily halting an easing cycle that began almost two years ago. Officials said the pause was signaled in their recent monetary program and pointed to persistent core inflation that remains above the bank's tolerance band. Policymakers will account for recently imposed tariffs on Asian imports and new taxes on selected goods when assessing future moves, though they expect only limited price effects from those measures.

Key Points

Banxico kept its policy rate at 7%, pausing an easing cycle that began nearly two years ago; the pause was signaled in the bank's recent monetary program.
Core inflation rose to 4.47% in early January, above the central bank's tolerance range, while headline inflation accelerated to 3.77% from 3.66%. These readings underpin the decision to hold rates.
Policymakers will factor in newly enacted import tariffs on Asian goods and taxes on products such as sweetened drinks when assessing policy, though they expect only limited effects on prices; sectors likely affected include consumer goods, import-dependent industries, and fixed-income markets.

Mexico's central bank voted to maintain its key interest rate at 7% on Thursday, effectively pausing the monetary easing that began nearly two years ago as underlying inflation pressures remain above the bank's tolerance range.

The decision was consistent with market expectations and had been foreshadowed by policymakers in the monetary program released last month. In that document, the board indicated it was likely to interrupt the easing cycle in February and then resume cuts later at a slower pace.

Recent official price data show headline annual inflation accelerated to 3.77% in the first two weeks of January, up from 3.66% in late December. Core inflation - which excludes volatile food and fuel items - climbed to 4.47% from 4.31% over the same timeframe. The core reading came in below the 4.52% median estimate but remains above Banxico's target range, defined as 3% plus or minus one percentage point.

Officials said they will take into account the inflationary implications of newly enacted import tariffs on goods from Asia when setting future policy. The board also noted new levies, including taxes on products such as sweetened drinks, and expects these measures to exert only a limited influence on overall consumer prices.

Banxico's easing campaign began in March 2024, when the central bank's lending rate stood at 11.25%. The current pause reflects a judgement to wait while key inflation indicators, particularly core inflation, remain above the bank's tolerance band.

The central bank's statement and prior monetary program indicate a calibrated approach: interrupt the tempo of rate cuts now and, if conditions allow, continue with smaller reductions at a later date. Monetary authorities will also monitor how recent fiscal measures and import levies feed into price dynamics as they map out the next steps.

Clear summary: Banxico maintained its benchmark rate at 7%, pausing an easing cycle that started nearly two years ago, citing core inflation that remains above its tolerance range. The bank said it will consider the inflationary effects of new tariffs on Asian goods and taxes on items like sweetened drinks but expects limited price impact.

Risks

Core inflation remains elevated at 4.47%, above Banxico's tolerance range, which could constrain the central bank's ability to resume easing quickly - this poses a risk to consumption and interest-rate sensitive sectors.
The inflationary impact of newly imposed tariffs on Asian goods and taxes on items such as sweetened drinks is uncertain; while the bank expects limited effect, these measures could transmit to consumer prices and affect retail and import sectors.
Planned resumption of easing at a slower pace introduces timing uncertainty for financial markets and borrowers, as the central bank signaled an interruption in February but did not commit to a definitive path forward.

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