Mexico central bank holds rate at 6.50%, pushes out inflation convergence forecast

Mexico's central bank, Banxico, maintained its benchmark interest rate at 6.50% and pushed back its inflation forecast convergence to target to the end of 2027.

​Mexico's central bank held its benchmark interest rate ​at 6.50% on Thursday, extending ‌the pause it ​began in June, and pushed back its forecast for headline inflation to converge to target to the end of next year. Banxico's five-member governing ‌board voted unanimously to keep the rate unchanged, in line with market expectations, and said maintaining the current level would be appropriate going forward.

"With regard to the inflation outlook, both headline and core inflation are still expected ‌to decline throughout the forecast horizon, albeit more gradually than previously anticipated," the bank said in its ‌statement. Banxico kept its forecasts for both headline and core inflation at the end of 2026 unchanged at 3.5%. It also pushed back its expectation for inflation to converge to its 3% target to the fourth quarter of 2027, from the ⁠second quarter previously.

The ​bank said risks to ⁠the inflation outlook remain biased to the upside, citing persistent core inflation, possible disruptions linked to foreign trade policies, geopolitical conflicts, climate-related ⁠pressures, cost pressures and the risk of peso depreciation. It added that changes in U.S. economic policy and a ​possible widening of geopolitical conflicts continue to add uncertainty to the outlook.

The statement was only marginally ⁠more hawkish than Banxico's June decision, Liam Peach, senior emerging markets economist at Capital Economics, said. "The bias will remain towards a pause ⁠in ​rates over the coming months but we still think the balance of probabilities is tilted towards tightening by year-end," Peach said.

Banxico also said economic slack is expected to persist throughout the forecast ⁠horizon and that significant downside risks to economic activity remain. Mexico's economy rebounded in the second quarter after contracting ⁠in the prior three-month ⁠period. Preliminary data released last week by statistics agency INEGI showed gross domestic product grew 1.5% in the second quarter from the previous quarter, after a ‌0.6% contraction in ‌the first quarter.