Mexico's central bank signals extended hold on rates as inflation cools

Mexico's central bank has signaled that interest rates are likely to remain at their current level for an extended period, even as inflation continues to moderate. The minutes from the bank's early August policy meeting, released on Thursday, show policymakers unanimously agreed to hold the benchmark rate at 6.5%.

The decision reflects concerns about the global economic outlook and lingering price pressures, particularly in the services sector. While headline inflation slowed to 3.10% in the first half of July and core inflation eased to 3.95%, services inflation — covering areas like restaurants, hotels, and air travel — has remained above 4% since late 2021.

Policymakers noted that services prices have been slow to adjust, with businesses still facing elevated labor and living costs. This stickiness in services inflation is seen as a key obstacle to bringing overall inflation back to the bank's 3% target. The bank has now pushed back its forecast for when headline inflation will converge to that target, expecting it to happen in the fourth quarter of 2027.

A stronger peso has provided some relief, helping to contain imported price pressures. The currency has gained nearly 6% this year, supported by a weaker dollar and Mexico's solid macroeconomic fundamentals.

On the growth front, the economy rebounded 1.5% in the second quarter after contracting in the previous three months. Manufacturing exports were a notable bright spot, with one board member highlighting strong demand for technology goods linked to artificial intelligence and tech supply chains. The share of technology goods in Mexico's exports has reportedly risen from under 5% in 2024 to nearly 25% now.

The minutes also noted that the U.S. Federal Reserve kept its target range unchanged at 3.50%-3.75% in July, though markets are pricing in a possible rate increase later in 2026.