Mexico's Banxico Defies US Interest Rate Hikes

Banxico, Mexico's central bank, left its policy rate unchanged at 6.50% as expected, and clarified that it will not follow the US Federal Reserve (Fed) mechanically due to differences in economic conditions between the two countries.

The focus is now on the lagged benefits of easing and inflation trajectory. Banxico expects to keep the current policy rate through the end of 2026, with stable rates also forecast for 2027 as there will be no further Fed hikes beyond December.

The Mexican peso (MXN) has remained resilient against the US dollar despite an initial knee-jerk selloff on the Iran war, thanks to sufficient interest rate spreads and a steep yield curve with a 10-year Mexico-US government bond spread still near 450 basis points.