MNI INTERVIEW: Banxico Likely To Hold Rates Until 2027 - Tapia

The Central Bank of Mexico is expected to remain on hold for the foreseeable future, maintaining its policy rate at 6.50% through the end of 2027, economist David Tapia told MNI, adding that the next policy move is still more likely to be a rate cut than a hike.

"Our base case is for a prolonged pause. We expect the policy rate to remain at 6.50% at the end of both 2026 and 2027," said Tapia, a former Banxico economist and currently chief economist at a large Mexican pension fund, in an interview.

He stressed that "the bar for a rate hike currently appears high." (See MNI INTERVIEW: Banxico End Signal Doesn't Prevent More Cuts)

"For them to tighten again, we would likely need to see a clearer and more persistent inflation deterioration or a significant weakening of the exchange rate," he said.

If there is another move, he believes it is more likely to be an eventual rate cut rather than a hike, "but only if cyclical weakness deepens, the exchange rate remains stable and supply-side shocks do not intensify."

CAUTIOUS PAUSE

The official message is one of caution and pause, and the market consensus has also shifted toward a terminal rate of 6.50%, he added.

Banxico cut its overnight interbank rate by 25 basis points to 6.50% last month and announced the end of its easing cycle, with Deputy Governors Jonathan Heath and Galia Borja dissenting in favor of holding borrowing costs unchanged.

"The decision to cut and announce the end of the easing cycle was consistent with the current macroeconomic balance, though with an important nuance in the communication," Tapia said.

He emphasized that the decision appears compatible with an economy that "has lost momentum," with no clear demand-side pressures and with monetary policy already in neutral territory. "In that sense, the move was reasonable."

The board's decision to explicitly signal the end of the cycle that began in March 2024 can be interpreted as an attempt to reinforce prudence, the former Banxico economist said.

COMMUNICATION KEY

The communication also helps prevent the market from extrapolating an automatic sequence of cuts in an environment where inflation remains above target and supply-side shocks continue to be relevant, he added.

"Overall, I see the decision as defensible in terms of the rate move and deliberately cautious in terms of communication. Banxico acknowledged the deterioration in the economic cycle while seeking to preserve its anti-inflation credibility."

The key message is that monetary policy has entered a less sequential and more data-dependent phase, Tapia said, where the evolution of inflation rather than economic weakness alone will once again become the decisive factor.

He argued that rates are now close to neutral, but that does not automatically mean policy has become accommodative.

"Rather, it suggests that Banxico has largely exhausted its room to continue cutting without incurring a greater reputational cost. My assessment is that the central bank sought to acknowledge economic weakness without compromising its anti-inflation credibility."