🇲🇽 The Price of Money

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🌀 The Great Unwind

On March 26, Banxico cut rates to 6.75%. 

A split 3-2 vote that caught markets off guard, with inflation running at 4.63%, above the 2-4% tolerance band, and the board's own forecasts flagging upside risk to prices. The majority cut anyway, prioritizing a sputtering economy over sticky inflation in what has become one of the most controversial monetary policy decisions in recent memory.

This marks the 14th consecutive cut since March 2024, a relentless easing cycle that has shaved 450 basis points off the 11.25% peak reached in March 2023. In barely over two years, Banxico has unwound more than half of the most aggressive tightening campaign in its modern history.

Here's the thing: Mexican interest rates have survived the Tequila Crisis that sent CETES past 80%, the Great Recession, a global pandemic, and every political earthquake in between. They've shaped wealth, savings, and capital flows in this country for three decades, and most Mexicans couldn't tell you what they are or how they work.

So, before saying why Mexico's central bank is racing to cut rates while inflation runs hot, let's start there.

Then we'll see monetary history can teach us about where we're headed.

💡 Why Rates Fall

Interest rates are, at their core, the price of borrowing money.

When Banxico sets its reference rate at 6.75%, it anchors the cost at which banks lend to each other overnight, and that single number ripples through the entire financial system, touching everything from mortgage payments to credit card bills to the yield on your CETES.

Central banks raise rates to cool inflation by making borrowing expensive and saving attractive, which pulls money out of circulation.

They cut rates to stimulate growth by making borrowing cheap, encouraging businesses to invest and consumers to spend.

The entire discipline of monetary policy lives in managing this tension, and right now, Banxico is tilting decisively toward growth. Why?

GDP growth came in at just 0.8% in 2025. That's the weakest full-year print since the pandemic, and the details underneath are worse than the headline. Manufacturing contracted -1.1% on the back of U.S. tariff uncertainty that left factories on both sides of the border paralyzed, and Q3 brought an outright quarterly contraction of -0.3%. January and February 2026 confirmed the slowdown is deepening, not reversing.

What gives Banxico the confidence to keep cutting into that inflation is the peso itself. 

A 15% appreciation since late 2024, bringing the exchange rate to roughly MX$17.25 per dollar, acts as a deflationary cushion that absorbs part of the price pressure the board is choosing to tolerate. 

With the real policy rate (nominal minus inflation) still near 2.25%, the board argues that monetary policy remains restrictive enough to keep prices in check even as nominal rates fall.

Deputy Governor Jonathan Heath disagrees, having voted to hold and warned that cutting while inflation accelerates risks undermining institutional credibility. But the majority bet is that a weak economy poses a greater danger than a temporary price spike. 

And this tension between growth and prices is nothing new for Banxico. 

🏛️ Three Decades of Mexican Rates

The institution has been navigating these tradeoffs for thirty years, and the historical record reveals just how far Mexico has come.

The chart above captures one of the most dramatic institutional transformations in emerging market history.

Let's start in 1995. The Tequila Crisis sent CETES rates past 80% as the peso collapsed, inflation hit 52%, and GDP fell 6.2% in a single year. 

Mexico needed a $50B international rescue package to stabilize. Rates stayed above 20% until the end of the decade, spiking again to 25-34% during the 1998 Russian crisis before resuming their descent.

The 2000s brought the discipline that made Banxico credible. 

The bank adopted formal inflation targeting in 2001, announced its 3% target (±1%) in 2002, and transitioned to an explicit overnight rate target on January 21, 2008, initially set at 7.50%. By then, CETES had already dropped from double digits to the 6-7% range, a quiet triumph of monetary policy.

The 2008 global crisis triggered 375 basis points of cuts in seven months, bringing rates to 4.50%. 

Further easing through 2013-2014 reached the all-time modern low of 3.00%, where rates held for 18 months before the 2015-2018 hiking cycle pushed them back to 8.25% in response to Fed tightening and Trump-era peso volatility. COVID reversed most of those gains, with emergency cuts bringing rates to 4.00% by early 2021.

Then came the most aggressive tightening in Banxico's history, 725 basis points across 15 hikes in 22 months, peaking at 11.25% in March 2023. 

Today's 6.75% has already unwound 450 of those. We're back to levels not seen since 2021, approaching what analysts estimate as a neutral rate near 6.50%.

The question now is how Mexico's rate compares to the one that matters most.

🇺🇸 Mexico vs. the United States

Banxico follows the Fed. Always has, always will. 

Mexico's economy is deeply intertwined with the United States, and maintaining a structural interest rate premium above the Fed is essential to compensating global investors for the added risk of holding peso-denominated assets. That premium has historically ranged from 400 to 600+ basis points, reflecting Mexico's higher inflation, sovereign risk, and currency volatility.

Right now, the spread sits at roughly 300 basis points. The Fed holds at 3.50-3.75%, Mexico at 6.75%. That's the narrowest gap in over a decade, down from more than 700 basis points at the peak of the 2022-2023 cycle, and the compression matters because this spread is the engine behind one of global finance's most popular trades.

The Mexican carry trade works by borrowing in a low-interest-rate currency and investing the proceeds in high-yielding Mexican assets. The profit is the interest rate differential, provided the peso holds steady. 

According to IMEF, carry trades and speculative bets account for approximately 78% of all peso transactions. Only 22% are tied to the real economy.

This creates a self-reinforcing loop. Foreign investors must buy pesos to invest in Mexican bonds, generating demand that appreciates the currency, which attracts even more carry capital because now you're earning yield AND currency gains. This dynamic powered the "superpeso" of 2023-2025.

🔮 What Now?

The carry trade exists because of the rate differential, yes. But it also exists because foreign funds can actually access Mexican yield. They have prime brokerage, FX lines, local custody, and the operational plumbing to turn "buy CETES" into a frictionless click.

Mexican businesses live on the other side of that gap.

Most of them couldn't buy CETES to save their lives. In fact, for them, the buy button doesn't even exist.

Until now.

To us, it didn't make sense that Mexican businesses couldn't tap into their country's own yield with the same ease a fund in London can.

That the process still runs on phone calls to brokers between 9 AM and 2 PM. 

That the tech powering every other corner of finance had skipped the part of the market where it mattered most.

So at Bando we built it. A treasury management portal where Mexican businesses can buy and sell tokenized CETES (and USDC) through abstracted crypto-enabled rails.

We essentially created the most efficient vehicle for immediate liquidity for SMEs in the country

If you're a Mexican business sitting on idle pesos, head to bando.cool and try it today. If you know a founder, CFO, or treasurer who still manages cash the old way, send our way.

Talk to us here to learn more.