Banco de Mexico Cuts Rates
Despite Global Uncertainty
On March 26, 2026, Banco de México’s Governing Board announced a decision to lower the target for the overnight interbank interest rate by 25 basis points to 6.75%, effective the following day. The move, determined by a majority vote, reflects the central bank’s evaluation of the current inflationary outlook, significant domestic economic weakness observed at the start of 2026, and a highly volatile international environment.
The Voting Breakdown
The decision to continue the rate-cutting cycle was supported by Victoria Rodríguez, Gabriel Cuadra, and Omar Mejía. In contrast, board members Galia Borja and Jonathan Heath dissented, voting to maintain the rate at 7.00%.
Inflation Trends and Forecasts
The rate cut occurs alongside a complex inflationary landscape. Headline inflation recently increased from 3.77% in the first half of January to 4.63% in the first half of March 2026, largely due to pressures in its non-core component. Core inflation, however, remained virtually unchanged at 4.46% during the same period. Due to a higher trajectory for non-core inflation and a more gradual decline in services inflation than initially anticipated, the central bank revised its headline and core inflation forecasts upwards for the first three quarters of 2026. Despite these short-term adjustments, Banco de México continues to project that headline inflation will converge to its 3% target by the second quarter of 2027.
Domestic Weakness and Global Volatility
In making its decision, the Governing Board weighed Mexico’s sluggish economic activity alongside a slight depreciation of the Mexican peso and an increase in medium- and long-term government interest rates. On a global scale, while economic growth for the first quarter of 2026 is expected to outpace the previous quarter, the outlook is heavily clouded by the ongoing Middle Eastern conflict. This geopolitical tension has triggered volatility in international financial markets, dampened risk appetite, raised commodity prices, and led to the US dollar's appreciation.
Risks and Future Monetary Policy
The central bank explicitly noted that the risks to the inflation trajectory remain biased to the upside. Major upside risks include potential disruptions from foreign trade policies or geopolitical conflicts, persistent core inflation, cost pressures, and potential climate-related impacts. Downside risks, on the other hand, involve lower-than-expected economic activity in either the US or Mexico and reduced pressures from the national currency’s appreciation observed since last year.
Moving forward, the Board will closely monitor both domestic macroeconomic conditions and external factors to evaluate the timing of any further rate cuts, reaffirming its primary mandate to consolidate low and stable inflation and achieve its 3% target.