MNI BANXICO WATCH: Dovish Decision Amid War Spurs Board Split

A fresh split within the Central Bank of Mexico's board highlights elevated uncertainty stemming from the Iran war and its short-term inflationary pressures, which could lead to a pause at the next meeting in May even though policymakers indicated they are still contemplating further easing after Thursday's 25-basis-point rate interest rate cut. 

Deputy Governors Jonathan Heath and Galia Borja dissented from the majority in favor of holding borrowing costs unchanged, while Governor Victoria Rodriguez and deputies Gabriel Cuadra and Omar Mejia chose to lower borrowing costs. Last year, when Banxico was cutting rates, Heath consistently voted to hold, while Borja sided with the majority. (See MNI BANXICO WATCH: 25BP Cut Seen, War Raises Longer Pause Odds)

In February, Banxico held rates at 7.00% and said it would "evaluate additional reference rate adjustments." Market participants were split going into the meeting, with some expecting a 25bp cut after dovish public comments from board members and others betting on a more prolonged pause.

WAR AND INFLATION REBOUND

The decision to resume the rate-cutting cycle came against the backdrop of a volatile war in Iran that could prove inflationary through higher oil prices, as well as a rebound in the current inflation rate, which rose to 4.63% in the first half of March.

The figure exceeded analysts’ consensus of 4.37% and increased from 4.13% in the end of February, and was above the central bank’s variability interval of 1 percentage point above or below the 3% target.

The board highlighted the increase in the non-core component. "Core inflation remained practically unchanged, shifting from 4.47 to 4.46% during the same period. As anticipated, there is no evidence of second-round effects from the fiscal measures adopted at the beginning of the year," the statement said. 

Regarding the war in Iran, Banxico said that "international financial markets registered volatility and a lower appetite for risk, and the prices of several commodities rose."

"The impact that the Middle Eastern conflict will have on the global economy is uncertain and will depend on its duration and intensity," they added.

To justify the cut, the board highlighted weak economic activity.

"Since the previous monetary policy decision, Mexico’s medium- and long-term government interest rates increased. The Mexican peso depreciated slightly. Economic activity showed significant weakness at the beginning of 2026. Although the outcome of the Middle Eastern conflict is difficult to anticipate, the environment of uncertainty continues to pose downward risks."