Banxico minutes flag upside inflation risks despite 6.50% rate hold

The Bank of Mexico (Banxico) held its monetary policy unchanged at a 6.50% interest rate during the September meeting, despite signaling that inflation risks are more likely to be on the higher side. Board members cited the elevated geopolitical uncertainty resulting from the conflict in the Middle East, complicating inflation forecasts.

Major board members pointed out that headline inflation expectations for the end of 2026 have declined. They also stated that the risk balance concerning the projected inflation path over the forecast period remains skewed towards the upside. One member noted that headline inflation is nearing the target due to the fading of price adjustments in the non-core component, with core inflation continuing its downward trend.

Established in 1995, Banxico is Mexico's central bank, tasked with maintaining the stability and value of the Mexican Peso (MXN) and setting monetary policy. Its primary objective is to keep inflation within a target range of 2% to 4%, ideally at 3%. The bank primarily influences policy by adjusting interest rates. When inflation exceeds the target, the bank raises rates, making borrowing more expensive and cooling the economy.

Typically, higher interest rates bolster the Mexican Peso (MXN) by offering attractive yields for investors, while lower rates weaken it. Banxico convenes eight times annually, closely monitoring decisions from the US Federal Reserve (Fed). The central bank's committee often convenes a week after the Fed, allowing Banxico to react to and sometimes predict the Fed's monetary policy moves.

Notably, after the Covid-19 pandemic, Banxico raised rates before the Fed, aiming to reduce the risk of a significant peso depreciation and prevent capital outflows that could destabilize the economy. The Middle East crisis has kept geopolitical risks high, which, combined with hawkish remarks from the Federal Reserve (Fed) and soaring US bond yields, likely maintains the US Dollar's strength over the Mexican Peso (MXN).