Bank of Mexico cuts rate to 6.25% in decision that surprised markets and divided board
Key Facts
The Bank of Mexico cut its target interest rate by 25 basis points to 6.25% on November 5, defying market expectations that it would hold at 6.50%, according to a report published by FXStreet on the day of the decision. A majority of the bank’s board members voted in favor of the cut, while two opposed it and preferred to hold at 6.50%, according to the bank’s statement. The decision puts the interest rate at a lower level, but the bank presented the move as a one-off adjustment and tied its next steps to the path of inflation. It said keeping the interest rate at the level it had reached for an extended period would support inflation’s convergence toward its target. The decision takes effect on November 6.
The vote revealed differences within the board over the timing of monetary easing. Victoria Rodríguez Ceja, José Gabriel Cuadra García and Omar Mejía Castelazo voted in favor of cutting rates, while Galia Borja Gómez and Jonathan Heath preferred to keep them at 6.50%, according to the decision minutes. The move came as the latest price figures available to the bank showed headline inflation accelerating, while core inflation edged lower. Between the first half of September and the first half of October, headline inflation rose from 3.42% to 3.62%. Over the same period, core inflation fell from 3.79% to 3.78%, according to the Bank of Mexico’s statement.
The bank raised its near-term inflation forecasts, signaling that the expected slowdown would be slower than it had previously estimated. It forecast average headline inflation of 3.7% in the fourth quarter of 2026, compared with a previous forecast of 3.5%. It also raised its core inflation forecast for the same period to 3.7% from 3.6%, according to FXStreet. By contrast, the bank kept its forecast for headline and core inflation in the fourth quarter of 2027 at 3%, unchanged from its previous estimate. This means the forecast revisions affected the nearer-term price outlook, while the bank’s estimate for the more distant period remained stable.
The Bank of Mexico said the balance of risks around the projected path of inflation remained tilted to the upside. The risks it cited included persistent core inflation and the possibility of further peso depreciation, while weak economic activity could limit price pressures. The assessment reflects a combination of factors pulling prices in both directions, with the bank maintaining its forecast that headline and core inflation would reach 3% in the final quarter of 2027. The bank summed up its rate stance by saying, "Keeping the benchmark interest rate at the level it has reached for an extended period will support inflation’s convergence toward its target." The guidance affirmed that the rate cut did not, in itself, signal a commitment to a sustained easing path.
On the activity front, the rate decision followed the release of a preliminary estimate showing stronger-than-expected growth in the third quarter. Gross domestic product grew 3.2% year over year, exceeding a forecast of 2.5% and the previous reading of 2.1% in the second quarter, according to data published by Investing.com on October 30. On a quarterly basis, growth was 0.9%, against a forecast of 0.7% and following growth of 1.4% in the previous quarter. The comparison shows that annual growth accelerated from the second quarter, while quarterly growth slowed from its previous level. The figures provide an economic backdrop to the decision, alongside the inflation data cited by the bank in its statement.
The rate cut was reflected in markets in the form of a weaker peso and divergent moves across maturities in government bonds. The Bank of Mexico said the peso had fallen since its previous decision and bond yields had declined at medium and long maturities but risen at short maturities. In a separate report published by FXStreet on November 5, the dollar traded at 19.74 pesos, after the pair touched an intraday low of 18.96. EL7 data recorded the pair’s close at 18.7533 on the same day. The FXStreet report also said markets had priced in an 88% chance of another cut by the bank before the end of 2026.