The Mexican central bank, known as Banxico, has released the minutes from its December meeting, showing a cautious approach to future monetary policy. In December, Banxico lowered interest rates by 25 basis points to 7%. Most board members supported this decision, except for Deputy Governor Jonathan Heath, who wanted to keep rates unchanged. The board’s decision was influenced by a strong Peso, a weak economy, and positive strides in inflation. However, they are cautious due to recent tax increases and import tariffs. Mexico has imposed 50% tariffs on imports from countries without trade agreements to support local industry, which aligns with US-Mexico-Canada relations.

Inflation Effects and Economic Activity

The governors view the inflationary impacts as temporary but are concerned about possible long-term effects. The minutes show that economic activity in Q4 2025 was still weak, following a GDP contraction of -0.29% in Q3. Banxico aims to maintain the Peso’s value by keeping inflation low and stable, targeting 2% to 4%. The bank raises interest rates to fight high inflation, closely monitoring actions by the US Federal Reserve. Banxico meets eight times a year, often reacting to or anticipating moves from the Fed. The recent meeting minutes indicate a cautious shift in approach to interest rate cuts. The 4-to-1 vote in December, where one member wanted to keep rates unchanged, suggests that deciding on future cuts will not be simple. This division among board members indicates that upcoming decisions will spark significant debate and rely heavily on data. The caution is justified, as inflation data from late 2025 showed core inflation rising to 4.8%. This suggests that new tariffs on Asian imports may be causing price pressures that are not as temporary as expected. Traders need to recognize that the high inflation seen in 2022 and 2023 could persist longer than anticipated.

Balancing Inflation and Economic Growth

At the same time, the bank faces a weak economy, which contracted in Q3 of 2025 and remained sluggish in Q4. Recent industrial production data confirms this downturn, showing reduced manufacturing output. This situation creates a challenge for the bank, forcing it to choose between controlling inflation and stimulating economic growth. The strong Peso, a key reason for the rate cut in December, continues to benefit from the interest rate gap with the United States. While Banxico has reduced rates to 7%, the U.S. Federal Reserve’s benchmark rate remains steady at 5.25%-5.50%, making carry trades appealing. However, Banxico’s cautious tone might slow the Peso’s rise. With these mixed signals, we can expect more volatility in the Mexican Peso and interest rate markets. Derivative traders might consider options strategies like straddles on USD/MXN, which could profit from significant moves in either direction as the market assesses whether inflation or growth concerns will prevail. The VIX equivalent for the Mexican Peso has already reached a three-month high during the first week of 2026. Additionally, the market had anticipated a steady cycle of rate cuts in the first half of 2026. With Banxico now advocating a “gradual approach,” expectations for the pace of these cuts need adjustment. Positioning for a flatter TIIE swap curve, effectively betting on fewer and slower rate cuts than expected, could be a strong strategy. Create your live VT Markets account and start trading now.

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