Bank of Mexico kept its main reference rate unchanged at 6.50% on Thursday, with the decision taken unanimously and broadly in line with expectations. The central bank said the balance of inflation risks remains tilted to the upside, and reiterated that holding the policy rate at its current level is appropriate while the board looks for clear evidence that core inflation is easing and that external or domestic shocks are not feeding into inflation.
Banxico said the current monetary policy stance is suited to the challenges in the macroeconomic environment, including factors linked to the international context, and reaffirmed its commitment to its primary mandate of low and stable inflation. On its projections, the board expects the Mexican economy to expand in the second quarter of 2026 after a contraction in Q1, while stating that downside risks to activity remain. Headline inflation is still expected to converge to the target in the second quarter of 2027.
Implications For Monetary Policy And The Mexican Peso
The Bank of Mexico holding its rate at 6.50% signals that we should not expect any cuts in the near future. Recent bi-weekly inflation data, which came in slightly above expectations at 4.75%, supports the bank’s cautious view. We believe the central bank will need to see several months of declining core prices before even considering a pivot.
This makes the Mexican Peso very attractive for carry trades, especially with the U.S. Federal Reserve rate now at a lower 4.75%. The significant interest rate differential should provide a floor for the peso against the dollar. We see value in selling USD/MXN volatility, as the high carry may keep the pair range-bound near the current 18.25 level.
Market Strategies In Rates, Swaps, And Equities
In the TIIE swaps market, we are adjusting our positions for a “higher for longer” reality. The 2-year swap rate has already repriced higher, jumping 15 basis points after the announcement to trade around 6.45%. We are now looking to receive fixed on short-term swaps, betting that the policy rate will remain anchored at its current level through the end of the year.
The central bank is choosing to fight inflation despite the economy contracting by 0.3% in the first quarter. This focus on price stability over growth creates a difficult environment for Mexican equities. We are considering buying protective put options on the IPC index as a hedge against potential downside economic surprises.
