Mexico’s central bank, Banco de México, or Banxico, has pushed back the date for a return to its 3% inflation target. The bank now expects headline inflation to reach that target in the fourth quarter of 2027. Its earlier forecast had put the return in the second quarter of 2027. The change shows that price pressure has proved more persistent than the bank had hoped. Banxico also kept its policy rate at 6.5% at its August 6 meeting. The decision was unanimous, and the latest minutes suggest that the rate may stay at this level for some time.
July Inflation Was Close to the Target
The latest inflation data do not show a major surge in prices. In fact, headline inflation fell to 3.10% in the first half of July. That figure is close to Banxico’s 3% goal. Core inflation, which removes some volatile food and energy prices, stood at 3.95%. So, the main picture is not one of a sharp new price shock. Instead, it is a story of slow progress.
The gap between headline and core inflation matters. Core inflation can give a better view of price pressure that may last for a longer period. At 3.95%, it remains well above the central bank’s 3% goal. This makes it harder for Banxico to declare victory over inflation.
Services Prices Are the Main Problem
Services have become one of the biggest concerns for Banxico. Prices in areas such as restaurants, hotels and air travel have stayed above 4% for a long period. Reuters reported that services inflation has remained above 4% since late 2021.
This part of inflation can be difficult to bring down. Many service firms do not change prices as often as companies that sell goods. When they do raise prices, they may take account of higher wages and other costs. Banxico’s latest minutes point to high labor costs and other cost pressures as reasons why services prices have stayed firm.
This explains why a headline rate near 3% does not mean the inflation problem has fully ended. The central bank wants to see broader price pressure settle before it takes more action on interest rates.
The 6.5% Rate May Stay for Some Time
Banxico’s decision to keep its policy rate at 6.5% is another key part of the story. The bank has already made a series of rate cuts in the past, but the latest pause shows a more careful approach.
The August minutes say the board sees it as appropriate to keep the reference rate at its current level for the time ahead. That does not mean the rate must stay at 6.5% for the whole of 2027. It does mean that Banxico does not appear eager to cut rates again while inflation risks remain.
A high policy rate can slow demand across the economy. Loans can cost more for households and firms. Credit can become less attractive, and some spending plans can face delays. At the same time, a firm rate can help keep inflation under control. For Banxico, that balance is now more important than a quick return to lower borrowing costs.
The 2026 Forecast Has Not Changed
Despite the later target date, Banxico did not change its year-end 2026 inflation forecasts. It still expects both headline and core inflation to reach 3.5% by the end of this year.
That point is important because the bank has not abandoned its view that inflation will fall. The main change is the pace. Banxico now expects the final part of the decline to take more time.
The bank said both headline and core inflation should continue to fall through the forecast period, but at a slower pace than before. This helps explain the move from the second quarter of 2027 to the fourth quarter of 2027 for the 3% target.
A Strong Peso Gives Mexico Some Help
Mexico has one major factor on its side: the peso. The currency has gained almost 6% so far in 2026. A stronger peso can reduce the local cost of imported goods and other products tied to foreign prices.
The currency’s strength has come mainly from a weaker US dollar, along with what Reuters described as solid economic fundamentals in Mexico. This has helped limit some price pressure.
However, the peso cannot solve every inflation problem. A strong currency can help with imported costs, but it does not directly fix high service prices, wage costs or local business expenses. Banxico therefore has to watch both external and domestic sources of inflation.
Mexico’s Economy Has Also Rebounded
The latest economic data give Banxico another reason to stay cautious. Mexico’s economy grew 1.5% in the second quarter after a contraction in the previous quarter.
Manufacturing exports were a bright spot. Non-automotive exports were especially strong, with demand from artificial intelligence and technology supply chains cited as one source of support. One board member noted that technology goods made up nearly 25% of Mexico’s exports at present, up from less than 5% in 2024.
A stronger economy can support jobs, wages and demand. Those factors can help growth, but they can also make it harder for inflation to fall quickly if demand stays strong. Banxico therefore has to balance price stability with economic activity.
The US Federal Reserve Adds Another Risk
Mexico also has to watch US monetary policy. The Federal Reserve left its federal funds target range at 3.50% to 3.75% in July. Markets have also priced in the possibility of a US rate increase later in 2026.
This matters because changes in US rates can affect global capital flows and currencies. Mexico’s central bank cannot base its decisions only on the Federal Reserve, but US policy remains an important part of the external backdrop.
If US rates stay high or rise, Banxico may need to be more careful with its own rate path. A large gap between US and Mexican rates can affect the peso and financial conditions. This adds another layer of uncertainty to Mexico’s outlook.
What the New Forecast Means for Markets
The delayed 3% target is a clear signal that Banxico may keep a cautious stance for longer than some investors had expected. The bank still sees inflation on a downward path, but it no longer expects the final step to 3% as soon as its previous forecast suggested.
For the peso, a longer period of high rates could offer some support. Higher Mexican rates can make peso assets more attractive to investors, especially when the currency already has support from a weaker dollar and solid economic data.
For households and companies, the picture is less simple. A 6.5% policy rate can keep borrowing costs elevated. Businesses that rely on credit may face higher financing costs, while households may find loans less affordable. The benefit is that firm monetary policy can help prevent a new rise in inflation.
Why the Fourth Quarter of 2027 Matters
The move to the fourth quarter of 2027 does not mean Banxico expects inflation to remain far above 3% until that point. Rather, it shows that the bank expects the final part of the decline to take longer.
The central bank has kept its end-2026 forecast at 3.5% for both headline and core inflation. From there, it expects further progress toward 3%. Yet services prices remain a key hurdle, and outside factors such as US rates, the peso and global costs can change the path.
For now, the message from Banxico is clear. Mexico’s inflation problem has improved, but the job is not finished. The central bank appears ready to accept a longer period of high interest rates in order to make sure inflation returns to 3% on a more durable basis.
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