MNI INTERVIEW: Banxico To Make A Short Easing Pause - Sanchez

A shift in the Central Bank of Mexico’s forward guidance suggests a pause in its easing cycle, but it could soon cut again if the inflationary impact from tax increases and tariffs turns out to be limited, former Banxico Deputy Governor Manuel Sanchez told MNI.

“The guidance suggests a pause. This could be as short as one or two meetings if the impact of the increase in the IEPS and the tariffs imposed by Mexico initially turns out to be insignificant,” Sanchez, now an economic advisor to Spruceview, said in an interview.

This month, Mexico implemented increases to the Special Tax on Production and Services (IEPS) in order to dampen consumption and boost revenue.

According to Sanchez, there was no significant change in tone in the minutes published two weeks ago, since most members of the board “continued to ignore the fact that inflation remains high.” (See MNI INTERVIEW: Banxico To Pause Easing Next Meeting - Cuadra)

He noted that members are arguing that any inflation pressure is the result of a change in relative prices and base effects, and that they express confidence that upside risks will be transitory.

“The communication objective of the majority continued to be confirming that the easing cycle has not ended,” he stressed.

Banxico cut its overnight interbank interest rate by 25 basis points to 7.00% last month, as expected, with Deputy Governor Jonathan Heath voting to hold borrowing costs unchanged. The board did not signal a cut at the next meeting as it had done in previous meetings, and instead said it would “evaluate the timing for additional reference rate adjustments.”

6% RATE FOR 2026

Sanchez expects a likely rate of 6.00% by the end of 2026, slightly lower than market consensus. “Its apparent objective is to cut as much as possible, and the governing board seems intent on easing the federal government’s financial burden,” he said.

Banxico could continue cutting past 6%, he said, adding that most members of the governing board do not need government pressure to extend their inclination to cut.

Sanchez said that he agrees with Heath’s argument that core inflation is not heading toward target, though he disagrees with him that the exchange rate is no longer central to inflation dynamics and that structural factors such as insecurity or competition explain inflation persistence.

“Decisions on the board will likely remain split, except during pauses, and, if core inflation dips below 4% and briefly nears 3%, Heath might push for larger cuts, as in 2019–2020. Persistent convergence to the 3% target will remain mostly rhetorical, helped by confusion between the variability range and the actual target,” he concluded.

INFLATION DROP DRIVEN BY NON-CORE

During 2025, annual headline inflation showed no clear trend, with notable ups and downs around 3.8%, the former deputy governor emphasized.

“Banxico had good luck, because non-core inflation, which has little to do with monetary policy, registered a significant drop in July, and remained unusually low during the second half of the year. However, core inflation, which suggests the medium-term trend of inflation, was on the rise.”

To clearly push headline inflation downward, Banxico would need to regain credibility with regards to its commitment to the target, he stressed.

“It would appear that the governing board is more concerned with counteracting the impediments to economic growth imposed by the current administration and easing the federal public debt burden than with bringing inflation down to the 3.0% target,” Sanchez said.

For 2026, he sees economic growth around 1.5%, below the average of 1.9% from 2000–2018.