By Brendan O’Boyle
MEXICO CITY, Jan 8 (Reuters) – Mexico’s central bank policymakers signaled greater caution on the pace of its interest rate cuts in 2026, citing trade uncertainty and new tariffs, minutes of the bank’s December monetary policy meeting showed on Thursday.
The minutes are likely to fuel expectations that Banxico could soon pause a rate easing cycle that began in 2024 and continued in December, when it cut its benchmark interest rate by 25 basis points to 7.00%, its lowest level since April 2022.
The December rate decision was 4-1, with Deputy Governor Jonathan Heath voting to hold.
The board’s majority argued that the quarter-point rate cut was justified by recent progress on inflation, a weak economy, and a strong peso, but flagged several factors meriting a more cautious outlook in future decisions.
Those include new taxes and tariff increases on imports that a majority of governors believe are likely to push up prices in 2026.
Mexico enacted tariff hikes of up to 50% on imports from China and several other Asian countries, with which it does not have a trade agreement, a measure aimed at boosting local industry. Lawmakers also approved a slate of new special taxes on certain products, such as soda, cigarettes and video games.
The minutes point to a wait-and-see approach, said Actinver Research, which expects a rebound in inflation in the first quarter due to the new taxes and tariffs, as well as to Mexico’s 13% increase in the minimum wage for 2026.
Thursday’s minutes show the governors mostly see the possible inflationary effects from the taxes and tariffs as temporary, but urged caution in case they lasted longer.
“The shocks anticipated for 2026 could impact price dynamics over the planning horizon and delay inflation convergence,” said one board member who voted for the rate cut, according to the minutes.
Another member commented that special taxes on certain products did not generally distort market prices, based on empirical evidence. “He/she highlighted that, however, on this occasion, it will take time to ensure that no second-round effects materialize either.”
That member, who also voted for December’s rate cut, said “a wait-and-see approach will need to be adopted.”
STUBBORN INFLATION
Analysts have largely anticipated the board to pause rate cuts at some point in the first half of the year, after interpreting changes in the December meeting’s future guidance as signaling a shift.
The board’s most hawkish governor Heath, who for months has been the sole dissenting vote in favor of steady rates, advocated keeping them where they are for an unspecified period in order to figure out how to bring down core inflation and prevent an uptick in headline inflation, the minutes showed.
The closely watched core index, which strips out volatile products, has been outside the central bank’s target range since May, rising for much of 2025. It ticked down – to 4.33% – in December but still remains above target, according to official data released on Thursday.
Banxico targets inflation at 3%, with a tolerance range of plus or minus one percentage point.
Annual headline inflation in 2025 came in at 3.69%, according to data released on Thursday, below economists’ forecasts.
Capital Economics’ emerging markets economist Kimberley Sperrfechter said that the easing in price pressures in December left the door open to a rate cut next month.
“But the central bank’s cautious tone, alongside still elevated core price pressures, means that we think a hold is a slightly more likely outcome,” she added.
Goldman Sachs economist Alberto Ramos said he expected Banxico to pause rate cuts at the next two meetings.
“Four of the five directors expressed dovish, though vigilant/cautious views on the outlook for inflation and monetary policy: they seem committed to extending the cutting cycle, likely after a pause to evaluate the impact of the upcoming increase in taxes and import tariffs,” he said.
(Reporting by Brendan O’Boyle; Additional reporting by Gabriel Araujo; Editing by Emily Green and Tomasz Janowski)
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