Mexico central bank signals prolonged pause in rates

On August 20, Mexico's central bank, Banxico, released minutes revealing a cautious approach to interest rates, indicating a possible pause in rate changes despite easing inflation. At their early August monetary policy meeting, Banxico maintained its benchmark rate at 6.5%, citing the global uncertainty and lingering inflation concerns.

Although Mexico's inflation has been decreasing, policymakers remain worried about service sector inflation, which has been persistently above 4% since late 2021. This has been a significant hurdle in achieving the bank's 3% inflation target. Banxico explained that service sector price pressures are still high due to the slow adjustment of prices by businesses and the ongoing elevated costs for labor and living expenses.

Furthermore, the bank projected that inflation would converge to the target in the last quarter of 2027. Despite this, Banxico noted that the strong Mexican peso, which has appreciated by nearly 6% this year, has helped keep price pressures in check. The currency has been bolstered by weaker dollar rates and Mexico's robust macroeconomic indicators.

Recent data showed Mexico's economy expanded by 1.5% in the second quarter, following a contraction in the preceding three months, with manufacturing exports being a key contributor. Notably, there has been a substantial rise in non-automotive shipments, particularly in technology goods, with their share in Mexico's exports increasing from under 5% in 2024 to nearly 25% currently.

The minutes also highlighted that the U.S. Federal Reserve kept its federal funds rate target range at 3.50%-3.75% in July, with markets anticipating a potential increase later in 2026.