In the span of a single week in early February, three of the world’s most consequential central banks delivered decisions that, read individually, seemed unremarkable. The Federal Reserve held at 3.50% to 3.75%. The European Central Bank held at 2.00%. Banxico held at 7.00%. Three holds, three different reasons, and three very different implications for where capital flows next. For investors in Mexican fixed income and equities, the convergence of these decisions creates a setup that is more interesting than any individual statement would suggest.
Central bank policy rates: the divergence
Source: Federal Reserve, ECB, Banxico, Bank of Japan. Data as of March 2026.
The Fed: on hold, but for how long?
The FOMC’s January 28 decision to hold at 3.50% to 3.75% was widely expected. What was not expected was the tone. Two governors dissented in favor of a 25 basis point cut, and the statement noted that “job gains have remained low” and “the unemployment rate has shown some signs of stabilization,” language that tilts dovish even within the context of a hold.
The Fed has now cut rates from 5.25% to 5.50% down to 3.50% to 3.75% over the course of 2024 and 2025. The September 2024 cut of 50 basis points signaled the start of the easing cycle, followed by three additional 25 basis point reductions to close 2024. After a long pause through the first three quarters of 2025, the Fed resumed cutting in September 2025, delivering three consecutive quarter-point reductions by December. The January 2026 hold marks the second consecutive pause.
Markets are pricing at most two more cuts in 2026 and none in 2027, which would leave the terminal rate somewhere around 3.00% to 3.25%. The Fed is navigating a narrow corridor: inflation remains “somewhat elevated” at roughly 2.5%, but the labor market is softening more than policymakers would like. Tariff uncertainty from the current administration adds another layer of complexity, making the growth outlook murkier than the inflation picture.
For Mexico, the Fed’s stance matters because it anchors the floor of the rate differential. As long as the Fed stays on hold or cuts slowly, Banxico has room to ease at its own pace without triggering capital flight.
The ECB: holding, but already done cutting
The ECB’s February 5 decision to hold the deposit facility rate at 2.00% was the fifth consecutive pause in a cutting cycle that began in June 2024. The ECB lowered its deposit rate from 4.00% to 2.00% through eight cuts over the course of 2024 and early 2025, with the last reduction in June 2025. Since then, the bank has been on hold.
The eurozone inflation picture has largely normalized: headline CPI dipped to 1.7% year-over-year in January 2026, below the ECB’s 2.0% target. But the Governing Council revised medium-term inflation expectations upward at the March meeting (2.6% for 2026, 2.0% for 2027), suggesting that the recent undershoot is transient and that the ECB sees little reason to cut further.
This is a meaningful shift from the narrative of just 12 months ago, when markets expected the ECB to cut toward 1.50% or lower. The ECB appears to view 2.00% as its neutral rate, and absent a severe growth shock, it is likely done for this cycle.
For Mexico, the ECB’s terminal rate at 2.00% creates an interesting carry dynamic. With Banxico at 7.00%, the Mexico-eurozone spread is 500 basis points. For European institutional investors, Mexican government bonds (particularly MBonos with their attractive real yields) offer a carry that is difficult to find elsewhere in the current global rate environment. As the ECB holds and the euro strengthens, EUR/MXN carry becomes increasingly attractive.
Banxico: the unanimous pause
Banxico’s February 5 decision was the most significant of the three for our purposes. The five-member Governing Board voted unanimously to hold the overnight interbank rate at 7.00%, pausing after 12 consecutive rate cuts that brought the policy rate from 11.00% in early 2024 to 7.00% by December 2025.
The unanimity is what stands out. In the later stages of the 2024 to 2025 easing cycle, votes had been split, with at least one board member favoring larger cuts. The unanimous hold signals that the entire board agrees: the easing cycle has gone far enough for now, and inflation pressures at the start of 2026 warrant caution.
Those pressures are real. Headline inflation rose to roughly 3.8% in early 2026, driven by fiscal adjustments and tariff-related price increases. Core inflation remained elevated at approximately 4.5%. Banxico explicitly pushed back its convergence timeline, now expecting headline CPI to reach the 3.0% target in Q2 2027, later than previously projected.
The private sector consensus survey expects two additional 25 basis point cuts in 2026, implying a year-end rate of roughly 6.50%. Our view is that this is plausible if core inflation decelerates in the second half, but the balance of risks is tilted toward fewer cuts, not more. As we discussed in our analysis of Mexico’s peso, the structural supports for the currency are closely tied to the rate differential. Banxico cutting too aggressively would put pressure on the peso at a time when USMCA uncertainty already creates headwinds.
The carry trade setup
Read together, the three decisions create a specific setup for capital flows. The Fed is on hold at 3.50% to 3.75%, with limited room to cut. The ECB is done at 2.00%. Banxico is at 7.00%, with a cautious easing path ahead. The Banxico-Fed spread is 325 to 350 basis points. The Banxico-ECB spread is 500 basis points. Both spreads are wide by historical standards and are now stabilizing rather than compressing.
Rate differential vs. peso: the carry still pays
Source: Banxico, Federal Reserve. USD/MXN approximate monthly averages. Right axis inverted so peso strength appears as an upward move.
For EM carry traders, the Mexico trade has three attractive features. First, the spread: 325 to 500 basis points depending on the funding currency, with Banxico unlikely to close the gap quickly. Second, the currency: the peso appreciated through Q1 2026 (from roughly 17.9 to 17.1 USD/MXN), providing a positive total return on top of the yield differential. Third, the institutional credibility: Banxico’s unanimous pause demonstrates a commitment to inflation targeting that many EM central banks lack.
The risk, as always, is a sudden peso depreciation that wipes out the carry. USMCA review uncertainty, a negative tariff shock, or an unexpected Banxico dovish pivot could all trigger a reversal. But the base case, a slow, data-dependent Banxico easing cycle against a stable Fed, is supportive of continued carry flows into Mexican fixed income.
Non-resident flows: the signal to watch
The most concrete evidence of the carry trade at work is the trajectory of non-resident holdings of Mexican government securities. Foreign investors hold significant positions in CETES (short-term treasury bills) and MBonos (long-term fixed-rate bonds). When the carry is attractive and the peso is stable, these holdings tend to increase. When the spread compresses or the peso weakens, foreign investors exit.
The February 2026 data suggests non-resident positioning remains constructive, supported by the wide spread and the strong peso. MBono 10-year yields in the low 9% range offer attractive real returns against Mexican inflation expectations of roughly 3.5% to 4.0%, providing a real yield of approximately 5% to 5.5%. This compares favorably to U.S. Treasuries (real yield roughly 1.5% to 2.0%) and German Bunds (real yield near zero).
What comes next
The next Banxico decision on March 26 will be the key event to watch. The brief mentions in the article queue suggest a 3-2 vote for a 25 basis point cut, resuming the easing cycle. If correct, the rate path from here is gradual: 6.75% in March, with further cuts contingent on inflation data. The Fed’s next decision is April 28 to 29, where another hold is the consensus expectation.
The divergence trade, long Mexico rates funded by short dollar or euro rates, has room to run as long as Banxico maintains its cautious approach. The five themes we outlined in our Five Trades for 2026 article identified the Banxico pause as Trade #1 precisely because the rate differential anchors the entire Mexico allocation thesis. The February decisions from all three banks confirm that thesis: the spread is wide, stable, and likely to compress only gradually.
The bottom line
Three holds from three central banks tell a story of convergence at the top and divergence in the middle. The Fed and ECB have largely completed their easing cycles, settling near their respective neutral rates. Banxico is still early in its journey from 11.00% to a terminal rate that the market places somewhere around 6.00% to 6.50%. The gap between where Banxico is and where it is going creates a predictable carry opportunity that is unusually well-supported by institutional credibility, peso stability, and attractive real yields. For international investors underweight Mexican fixed income, the window is open. The question is whether they will walk through it before the market prices it in.