On March 26, Banxico’s Governing Board voted 3-2 to cut the overnight interbank rate by 25 basis points to 6.75%, resuming the easing cycle after the unanimous pause in February. The cut was unexpected: only 14 of 37 analysts surveyed by Citi anticipated a reduction, with the majority expecting the board to hold at 7.00% given that headline inflation had risen from 3.77% in mid-January to 4.63% by mid-March. The decision to cut into rising inflation, with a split vote and revised-up inflation forecasts, tells us more about where the board’s priorities lie than any forward guidance language could.
Banxico rate path: easing resumed
Source: Banxico, The Investment Case estimates. Forward paths are illustrative.
What changed between February and March
The February 5 decision was a unanimous 5-0 hold. The March 26 decision was a contentious 3-2 cut. In six weeks, the board went from full consensus on caution to a bare majority in favor of easing. Three things shifted the calculus.
First, the growth data deteriorated. Mexico’s economy grew just 0.8% in full-year 2025, the weakest since the pandemic year. Q4 2025 showed a rebound (0.8% quarter-over-quarter after a 0.3% contraction in Q3), but early 2026 indicators pointed to renewed softness. The board’s statement explicitly cited “the weakness of economic activity” as a factor in the decision. Governor Victoria Rodriguez, who voted for the cut alongside Gabriel Cuadra and Omar Mejia, clearly weighed the growth risk more heavily than the inflation risk.
Second, the board reframed the inflation picture. Headline inflation rose sharply, but core inflation barely moved: 4.47% in mid-January to 4.46% in mid-March. The increase in headline was driven entirely by non-core components, primarily energy prices related to the Strait of Hormuz disruption and seasonal agricultural effects. The majority of the board judged these non-core pressures as transitory, meaning they would reverse as oil prices normalize, rather than structural. This is a bet: if the Hormuz disruption persists and energy costs stay elevated, the transitory assumption could prove wrong.
Third, the board factored in the cumulative monetary restriction already in place. Even after the cut, the real policy rate remains deeply positive: 6.75% against 4.63% headline inflation is roughly 210 basis points of real restriction. Against core inflation of 4.46%, the real rate is approximately 230 basis points. The majority judged that this degree of tightness is sufficient to contain inflation pressures, even with the non-core spike.
The dissent matters
Galia Borja and Jonathan Heath voted to hold at 7.00%. Their reasoning, based on the pattern of previous dissents and Heath’s public commentary, centers on the credibility risk of cutting while inflation is rising and forecasts are being revised upward. This is not a trivial objection.
Banxico simultaneously raised its inflation outlook for three of four quarters in 2026. Q1 2026 was revised from 4.0% to 4.1%, Q2 from 3.8% to 4.0%, Q3 from 3.6% to 3.7%. Only Q4 was left unchanged at 3.5%. The bank still expects convergence to the 3.0% target in Q2 2027, but the path to get there is now steeper. Cutting rates while raising inflation forecasts and acknowledging upside risks is an unusual combination. Bloomberg Opinion’s Juan Pablo Spinetto captured the skepticism: Banxico “says risks to inflation remain biased to the upside, that geopolitical risks could imply pressures on inflation, raises its forecasts for inflation, and despite all this, cuts its interest rate.”
The dissenters’ implicit argument is that credibility is non-linear: a central bank that cuts during rising inflation risks undermining the anchoring of inflation expectations, which is far harder to rebuild than the growth lost by waiting one more meeting. For our purposes, the 3-2 split signals that the next decision is genuinely uncertain. If inflation prints continue to surprise to the upside, the May meeting could easily produce a 3-2 hold or even a unanimous pause.
What comes next: the rate path from here
The market consensus before the March decision had expected two more cuts in 2026, with a year-end rate of roughly 6.50%. The SHCP’s own forecast places the year-end rate at 6.30%. After the surprise March cut, the path is less clear.
Our read is that the board will be data-dependent in the truest sense. If headline inflation begins to recede in Q2 as non-core pressures fade (assuming the Hormuz situation stabilizes), the majority will have the cover to deliver another 25 basis point cut at the May 15 meeting, bringing the rate to 6.50%. If inflation remains elevated, the board will pause again, and the dissenters’ position strengthens for subsequent meetings.
The key variable is the Strait of Hormuz. The oil price spike that sent Brent above USD 100 in March is the primary driver of non-core inflation. If the disruption resolves and energy prices decline, the board’s transitory assumption will be validated and further cuts become likely. If the disruption persists through Q2, energy-related inflation will feed into transportation, food, and services prices, making the non-core/core distinction less relevant and narrowing the board’s room to ease.
The five remaining Banxico meetings in 2026 (May 15, June 25, August 13, September 24, November 12) provide ample opportunities for a gradual path lower, but the pace will be slower than the market expected even a month ago. A year-end rate of 6.25% to 6.50% is plausible in the base case, with 6.75% (no further cuts) as the tail risk if inflation does not cooperate.
Implications for the carry trade
For carry trade investors, the March decision is broadly supportive. A 25 basis point cut from 7.00% to 6.75% barely dents the spread: the Banxico-Fed differential is still 300 to 325 basis points, and the Banxico-ECB spread is 475 basis points. These remain wide enough to compensate for moderate peso volatility.
The more significant signal is the board’s revealed preference: this is a board that will cut even when the surface-level inflation data argues for caution, as long as core inflation is contained and growth is weak. That suggests the easing cycle is not over, which means the rate differential will continue to compress gradually. For carry traders, the timing of the compression is what matters: a slow, predictable descent from 6.75% toward 6.25% over the balance of 2026 is manageable. A sudden dovish pivot, two consecutive 50 basis point cuts, for example, would be a different story. The 3-2 split argues against the sudden scenario.
As we wrote in our analysis of the February decisions, the carry opportunity is anchored by institutional credibility. The March vote tests that anchor, but does not break it. A central bank that cuts 25 basis points with a split vote, raises inflation forecasts, and explicitly cites upside risks is being transparent about the tradeoffs it is making. That transparency, paradoxically, supports the carry trade more than a unanimous cut would have, because it signals that future easing will be cautious and contested.
The bottom line
The 3-2 vote to cut to 6.75% tells us that Banxico’s board is prioritizing growth weakness over inflation persistence, but only by one vote. The dissent from Borja and Heath, the upward revision to inflation forecasts, and the explicit acknowledgment of upside risks all signal that the next cut is far from guaranteed. The rate path from here depends on whether the non-core inflation spike proves transitory, which in turn depends on whether the Strait of Hormuz disruption resolves. For investors, the message is: the easing cycle is alive, but it is no longer on autopilot. Every meeting from here will be a genuine decision.