The Bank of Mexico, known as Banxico, reduced interest rates from 7.25% to 7% in a decision made with a 4-1 vote. Deputy Governor Jonathan Heat dissented, preferring to maintain the existing rate.
Banxico’s board intends to assess future rate adjustments, keeping an eye on the inflation target expected by the third quarter of 2026. The US Dollar to Mexican Peso (USD/MXN) exchange rate showed minimal reaction to this decision, staying around 18.00.
Bank Meetings and Influence
Banxico meets eight times a year and closely monitors the decisions of the US Federal Reserve, often timing its meetings a week after the Fed’s. The bank uses interest rates to influence inflation, aiming to maintain it within a 2% to 4% target range.
Higher interest rates attract more capital which can bolster the Mexican Peso, while lower rates might weaken it. Banxico took proactive measures to stabilise the peso after the Covid-19 pandemic, even acting before the US Fed.
Banxico is responsible for maintaining the value of the Mexican Peso and aims to achieve stable inflation within target levels. The bank’s policy decisions can have substantial effects on Mexico’s economy and investor confidence.
Market Reactions and Strategies
The Bank of Mexico’s recent rate cut to 7.00% was fully priced into the market, explaining the muted reaction in the USD/MXN pair. We see this as the start of a gradual easing cycle, not an aggressive series of cuts. Mexico’s latest inflation reading for November 2025 came in at 4.1%, justifying the central bank’s cautious stance about future moves.
The key factor remains the rate differential with the United States, which is still a substantial 250 basis points. The US Federal Reserve has held its benchmark rate at 4.50% for the last two meetings, citing persistent core inflation which stood at 3.8% in the latest report. This wide gap continues to make holding the Mexican Peso attractive for carry trades.
Given that this move was widely anticipated, implied volatility in USD/MXN options has likely fallen, making strategies like selling out-of-the-money calls attractive for generating income. This approach benefits if the pair remains below key resistance, like the 18.07 level. For those anticipating a reversal, the lower volatility also makes purchasing long-dated calls a cheaper way to position for a weaker Peso next year.
We are watching the forward markets closely, as they will indicate how quickly traders expect the rate gap to close. The Peso’s incredible strength is a multi-year story, building on the trend seen throughout 2023 and 2024 when the rate differential often exceeded 600 basis points. As long as Banxico signals a slower cutting pace than the market prices in, being short USD/MXN futures remains a viable strategy.
