A Banco de Mexico Deputy Governor has warned against quickly lowering interest rates because inflation remains high. Even after several rate cuts, core inflation is still above the target of 3%. Although inflation rates are below 4%, they haven’t met the central bank’s goals. Rising labor costs and international food prices are slowing progress toward this target.

Banco de Mexico’s Meetings and Strategies

Banco de Mexico holds meetings eight times a year, often aligned with decisions made by the US Federal Reserve. Typically, Banxico meets a week after the Fed to adjust or anticipate changes in monetary policy. Banxico mainly uses interest rate changes to influence the value of the Mexican Peso. Higher rates usually strengthen the peso, making Mexico more appealing due to better returns. Conversely, lower rates often weaken the currency. This monetary policy has connections to global investment strategies, showing how interconnected economic actions are worldwide. Decisions made by central banks can significantly affect national currencies and economic stability. Banxico aims to maintain the Mexican Peso’s value by frequently analyzing economic indicators to keep inflation low and stable, aiming for a 3% target within a set tolerance range.

Effects of Recent Data and Global Signals

Deputy Governor Heath’s comments add uncertainty to what seemed like an ongoing rate-cutting plan by Banxico. His focus on the 3% inflation target hints at division among the bank’s board members. For weeks, many expected continued easing, but this dissent makes us rethink the timing of future cuts. This perspective is gaining traction as new data from INEGI for the first week of October 2025 shows headline inflation rising to 4.4%, supporting Heath’s view on persistent prices. Core inflation in September was at 4.28%, indicating that pressures from labor costs are not easing. The market can no longer expect a straightforward decline in interest rates. The situation is further complicated by the US Federal Reserve, which has indicated it may pause on rate cuts. Futures markets now suggest a possible cut in the first quarter of 2026. This reduces the interest rate difference that has helped the Peso, making additional cuts by Banxico riskier for the currency. We must closely monitor Fed comments as well as Banxico’s. For derivative traders, this conflict points to increased volatility ahead. One-month implied volatility on USD/MXN options has already risen over 15% since these statements, with current trading near 13.5%. This makes strategies like buying straddles or strangles appealing for potential sharp moves after the next policy meeting. Thus, we should prepare for two different scenarios before the November meeting. Traders who think Heath’s cautious approach will prevail might consider put options on USD/MXN, betting on a stronger Peso if Banxico pauses cuts. On the other hand, those who believe the dovish majority will continue easing could look at call options to profit from a weaker Peso. We’ve seen this before. When we reflect on the tightening cycle that began in 2021, Banxico has shown its ability to hold firm against inflation. Heath’s dissent might signal that the bank is ready to return to that stance. The straightforward trading of following rate cuts is now over, requiring a more cautious and balanced strategy. Create your live VT Markets account and start trading now.

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