Banxico unexpectedly cut rates by 25 basis points to 6.25%

Christian Borjon Valencia FXStreet

On Thursday, the Bank of Mexico – known as Banxico for its Spanish acronym – cut rates by 25 basis points to 6.25%, in an unexpected move that caught market participants off guard, who had expected rates to remain unchanged at 6.50%.

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Economic Indicator

Banxico Interest Rate Decision

The Bank of Mexico (Banxico) announces its interest rate decision at the end of its eight scheduled meetings per year. If Banxico is hawkish about the inflationary outlook of the economy and raises interest rates, it is usually bullish for the Mexican Peso (MXN). Likewise, if Banxico adopts a dovish view on the Mexican economy and keeps interest rates unchanged, or cuts them, it is generally seen as bearish for MXN.

Banxico FAQs

What is the Bank of Mexico?

The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.

How does the Bank of Mexico’s monetary policy influence the Mexican Peso?

The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.

How often does the Bank of Mexico meet during the year?

Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.

Author

Christian Borjon Valencia

FXStreet

Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.

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