Economics: Banxico faces high uncertainty amid still-uncontrolled core inflation and the Fed rate outlook
Banxico's Governing Board unanimously held the reference rate at 6.5% at its last monetary policy meeting, closing out an easing cycle that had accumulated a 475-basis-point reduction since March 2024. The pace of cuts had been rapid, and the pause comes at a time when core inflation remains above 4% with no clear sign of converging toward the target, while the decline in headline inflation to 3.55% in the first half of June is due solely to the non-core component—volatile and beyond the reach of monetary policy—which could reverse given any energy or agricultural shock.
The external backdrop adds further pressure. The Fed, under its new chair Kevin Warsh, dropped any easing bias at its June meeting, and its dot plot now points to possible rate hikes before the end of 2026, against a backdrop of 4.2% U.S. inflation. This reverses the scenario that prevailed just a few months ago, when markets anticipated the Fed might eventually resume its own easing cycle. The spread between Banxico's rate and the Fed's average rate now stands at its lowest level since 2015, severely limiting the Mexican central bank's room to maneuver in responding both to Fed moves and to episodes of financial volatility stemming from the USMCA annual review process.
Separately, Banxico recently published Circular 8/2026, which authorizes it to purchase government securities in the secondary market starting in August. Although the central bank clarified that this does not amount to financing the government or a quantitative easing policy, the measure can be read as preparation for stress scenarios—such as a possible loss of sovereign investment grade, which could trigger mass sell-offs of government debt. The implicit risk is that financial institutions liquidating those securities could shift into foreign-currency instruments, generating additional pressure on the exchange rate.
Turning to last week's indicators, budgetary revenues for the first five months of 2026 continued to decline, falling 1.8% in real annual terms, including oil revenues (−3.2%) and tax revenues (−1.4%). Net spending grew 2.3%, driven especially by current programmable spending (+4.3%). The public balance deteriorated sharply (+42.6%), posting -528 billion pesos, while the primary balance was practically nil (22 billion pesos), and the Federal Government's balance reached -260 billion pesos.
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