The Mexican central bank, known as Banxico, shared its December meeting minutes, indicating a gradual stance on future monetary policy. In December, Banxico reduced interest rates by 25 basis points to 7% with most members supportive, except Deputy Governor Jonathan Heath, who voted to maintain rates.
The board based its decision on a strong Peso, weak economy, and progress on inflation, but expressed caution due to new taxes and import tariffs. Mexico imposed 50% tariffs on imports from countries without trade agreements to boost local industry, aligning with US Mexico-Canada relations.
Inflationary Effects And Economic Activity
Governors perceive these inflationary effects as temporary but caution on potential long-term impacts. The minutes revealed Q4 2025 economic activity remained weak, with a Q3 GDP contraction of -0.29%.
The Bank of Mexico’s mission is to preserve the value of the Peso through low and stable inflation within 2% to 4%. Banxico uses interest rates as a tool, raising them to combat high inflation, and its monetary policy greatly considers US Federal Reserve actions. Banxico convenes eight times a year, often responding to or anticipating Fed measures.
The Mexican central bank’s recent minutes show a clear shift towards a more cautious and gradual approach on interest rate cuts. The 4-to-1 split vote in the December 2025 meeting, with one member wanting to hold rates, signals that the path for further easing is no longer straightforward. This division on the board suggests future decisions will be heavily debated and data-dependent.
This new caution is justified, as we just saw the inflation data for the end of 2025 come in hot, with core inflation ticking up to 4.8%. This validates the concern that new tariffs on Asian imports are creating price pressures that might not be as temporary as hoped. For traders, this means the high inflation that plagued us in 2022 and 2023 could prove stickier than anticipated.
Balancing Inflation And Economic Growth
At the same time, the bank is contending with a very weak economy, which contracted in the third quarter of 2025 and remained sluggish in the fourth. The latest industrial production figures released this week confirm this slump, showing a decline in manufacturing output. This creates a difficult balancing act, forcing the bank to choose between fighting inflation and stimulating growth.
The strong Peso, which was a key factor allowing for the rate cut in December 2025, remains supported by the significant interest rate differential with the United States. While Banxico has cut rates to 7%, the U.S. Federal Reserve has held its benchmark rate steady in the 5.25-5.50% range, keeping the carry trade attractive. However, this new hesitant tone from Banxico could slow the Peso’s momentum.
Given these conflicting signals, we should expect increased volatility in the Mexican Peso and in interest rate markets. Derivative traders could consider buying options strategies like straddles on USD/MXN, which profit from a large move in either direction, as the market digests whether inflation or growth concerns will win out. The VIX-equivalent for the Mexican Peso has already edged up to a three-month high in the first week of 2026.
Furthermore, the market had previously priced in a consistent cycle of rate cuts throughout the first half of 2026. With the bank now emphasizing a “gradual approach,” bets on the speed of these cuts need to be unwound. This makes positioning for a flatter TIIE swap curve a compelling strategy, essentially betting that near-term rate cuts will be fewer and slower than what was expected just a few weeks ago.
