Banxico holds rate at 6.5%, pledges to stay on hold longer

Mexico's central bank unanimously voted to hold its benchmark rate at 6.50%, marking an extended pause after more than two years of rate cuts.

The Bank of Mexico held its benchmark interest rate at 6.50% on Thursday and pledged to keep it there for longer, as policymakers assess the impact of recent price shocks on an inflation outlook that has shown signs of cooling.

"The board considers that the current level of the reference rate is appropriate to guide inflation toward the 3% target," the central bank said in a statement, adding that it expects to maintain the rate "for an extended period."

The unanimous decision by the five-member board marks the end of a prolonged easing cycle that saw Banxico cut rates over more than two years, with the final reduction in May. Mexico's annual inflation rate likely slowed in May, according to a Reuters poll of 15 analysts, though the central bank flagged that recent price shocks require further assessment before any additional easing.

The hold puts Mexico in a holding pattern alongside other Latin American central banks navigating sticky inflation and uncertain global demand. Bank of America expects Banxico to keep rates at 6.50% through the end of 2026, citing weak growth and persistent price pressures. The peso traded at 0.05720 per dollar on Thursday, up 0.7%, reflecting the market's neutral-to-slightly-positive read on the decision.

The decision comes as Mexico's economy faces headwinds from slowing US demand and elevated borrowing costs. The central bank's easing cycle, which began in early 2024, delivered cumulative cuts before pausing at 6.50%. The last time Banxico held rates at this level for an extended period was in 2023, when inflation remained above the 3% target for 18 consecutive months, according to central bank data.

The peso's modest gain on Thursday suggests investors view the hold as a stabilizing force for the currency, which has traded in a range of 0.0527 to 0.0585 per dollar over the past 52 weeks. Mexican sovereign bonds saw muted moves, with the 10-year yield little changed as traders digested the forward guidance. The MXN/USD pair has gained about 8.3% over the past year, supported by Mexico's relatively high interest rates and resilient export sector.

Banxico's decision also reflects the broader global central bank environment, where policymakers are grappling with how long to keep rates elevated. The US Federal Reserve's latest Summary of Economic Projections showed officials expect fewer cuts than previously forecast, with core PCE inflation running at 3.4% year-over-year in May — well above the Fed's 2% target. That dynamic limits Banxico's room to ease, as rate differentials with the US drive capital flows into peso-denominated assets.

Mexico's unemployment rate stood at 2.7% in May, up slightly from 2.6% in April, according to data released Thursday, suggesting the labor market remains tight even as economic growth moderates. Finance Minister Edgar Amador Zamora said earlier this month that the economy could exceed the OECD's latest growth forecast, indicating domestic demand may remain resilient enough to withstand elevated rates.

Looking ahead, Banxico's next policy meeting is expected in August. The central bank's ability to resume cuts will depend on whether inflation continues its downward trajectory and whether the economy shows further signs of softening. For now, the message from Mexico City is clear: rates will stay where they are until the inflation picture becomes unmistakably clearer.

This article is for informational purposes only and does not constitute investment advice.