Latam Flash: Mexico—Banxico Hold, in Line with Expectations

• Banco de México’s Governing Board decided to keep the reference interest rate at 6.50%, in a unanimous vote.

• The Governing Board expects economic activity to expand during Q2 2026, with downside risks persisting.

• Headline inflation forecasts remained unchanged for the remainder of the year, with convergence to the target expected in Q2 2027.

• We maintain our view that the target interest rate will close the year at 6.50%, subject to the path of inflation, the exchange rate level, and the interest rate differential between Mexico and the United States.

Banco de México’s Governing Board unanimously decided to leave the reference interest rate unchanged at 6.50%. This decision was in line with market expectations, after the previous decision explicitly brought to an end the easing cycle that began in March 2024 and accumulated 475 basis points. In addition, the Board marginally revised upward its core inflation projections, while keeping unchanged its headline inflation estimates, as well as the expected convergence to the 3.0% target by the second quarter of 2027.

The statement noted that, during the first quarter of 2026, global economic activity expanded at a pace similar to that of the previous quarter. This occurred despite an increase in headline inflation in some advanced economies as a result of higher energy prices, while core inflation showed mixed behaviour across countries. It highlighted that the Federal Reserve kept its reference rate unchanged at its June meeting, that financial markets showed volatility, and that commodity prices declined, alongside an appreciation of the dollar and increases in most U.S. Treasury yields. Finally, the statement reiterated the persistence of an uncertain outlook regarding the conflict in the Middle East and its repercussions, although recent negotiations suggest that a solution may be on the horizon.

Regarding domestic conditions, the Governing Board noted that, since the last monetary policy decision, interest rates on government securities in Mexico declined across most maturities, while the peso depreciated. The Mexican economy is expected to expand during the second quarter of 2026 after contracting in the previous quarter; therefore, a greater degree of slack than previously anticipated continues to be expected, along with persistent downside risks going forward.

As for inflation, short-term forecasts were marginally revised downward (table 1), anticipating an average level of 4.0% during the quarter (vs. 4.1% expected in the previous decision) due to the moderation observed in the non-core component, especially agricultural products, in the reading for the first half of June when inflation slowed from 3.77% to 3.55%, surprising analysts. However, the short-term forecast for the core component was revised slightly upward to 4.2%, in line with observed persistence. The Governing Board reiterated that it expects headline inflation to converge to the target in Q2 2027, with the balance of risks skewed to the upside, including: disruptions from trade policies, inflationary effects from geopolitical conflicts, persistence of core inflation, climate-related impacts, cost pressures, and a depreciation trend in the peso. On the other hand, downside risks mentioned included: weaker-than-anticipated economic activity, a lower pass-through from cost increases, and lower pressures from the peso appreciation observed since last year.

We believe that the monetary policy decision reflects a neutral stance, although the balance of inflation risks remains skewed to the upside. This is because the statement reiterates that the Governing Board believes it is appropriate to keep the reference rate at its current level to address the challenges of the macroeconomic environment. In this context, it will be important to monitor the evolution of inflation and developments in the Middle East conflict, as well as the impact of higher energy prices and potential second-round effects on goods and services, in addition to domestic economic weakness, exchange rate behaviour, and the relative stance versus the Federal Reserve. We maintain our projection of a 6.50% rate by end-2026, as long as second-round effects from increases in taxes, tariffs, the minimum wage, and energy prices do not materialize. Finally, it will be relevant to analyze the minutes to be published on July 9^th, 2026.

Regarding the market reaction, the exchange rate moved marginally and stood at MXN 17.50 per dollar. Meanwhile, the TIIE Funding curve (chart 1) showed limited moves. The short end (up to 1 year) declined between 3 and 1 bp, while the rest of the curve up to 30 years declined between 2 and 4 bp. The three-month implied curve stood at 6.55% (chart 2), while the one-year rate stood at 6.71%, implying market expectations for upward adjustments one year ahead.