Banxico Pauses Rate Cuts at 7%, Citing New Taxes and Tariffs That Could Delay Inflation Target to 2027

Mexico’s central bank halted its interest-rate cutting campaign Thursday, keeping the benchmark rate at 7% and warning that new taxes and tariffs will delay inflation’s return to target until mid-2027.

At its first monetary policy meeting of the year on Feb. 5, the Bank of Mexico’s five-member governing board voted unanimously to leave the overnight interbank rate unchanged, ending a run of 12 consecutive reductions that began in March 2024 and lowered borrowing costs by 4.25 percentage points from a record 11.25%.

“The Governing Board judged it appropriate on this occasion to pause the cycle of reductions in the reference rate,” the bank said in its policy statement, adding that the decision was “consistent with the assessment of the current inflation outlook and the need to continue evaluating the impact of the fiscal changes implemented at the start of the year.”

A pause at the crossroads of tax, trade and inflation

The central bank made clear that the pause is tied directly to recent policy decisions in Mexico City, not to a sudden deterioration in economic data.

On Jan. 1, higher excise taxes on sugary drinks and tobacco took effect under a reform of the Special Tax on Production and Services, known by its Spanish acronym IEPS. At the same time, a wide-ranging package of new import tariffs on products from China and other countries without free trade agreements with Mexico came into force.

Taken together, those measures are expected to push up consumer prices enough that inflation—now just under 4%—will not converge to the bank’s 3% target until the second quarter of 2027. As recently as December, the bank projected hitting its goal in the third quarter of 2026.

Headline inflation stood at 3.77% year over year in the first half of January, close to the midpoint of the bank’s 2% to 4% tolerance band. But core inflation, which strips out volatile food and energy prices and is a key gauge for policymakers, was still 4.47%.

Board members have said the tax and tariff changes will have mostly one-time and transitory effects on inflation, but large enough to shift the entire disinflation path outward.

From record highs to a careful pause

Mexico’s interest rates climbed to 11.25% in March 2023, the highest on record, as the bank fought a global inflation spike. As price pressures eased, Banxico— as the institution is known—began lowering its benchmark at the March 21, 2024 meeting and continued cutting in quarter-point steps through Dec. 18, 2025, when the rate reached 7%.

That easing phase provided relief to borrowers after years of tight money and aligned Mexico with a broader move by emerging-market central banks to step back from crisis-era highs. But it also drew criticism from some analysts who argued that the bank risked moving ahead of the data while core inflation remained elevated.

The February decision appears designed to reassure markets that the central bank is not prepared to ignore fresh price pressures stemming from fiscal policy, even as growth remains soft and the labor market shows signs of cooling.

Soda, cigarettes and the price index

The IEPS reform, published in November and applied beginning this year, sharply increases specific taxes on products the government has labeled harmful.

Sugary beverages now face a charge of 3.0818 pesos per liter if they contain added sugar and 1.50 pesos per liter if they contain non-caloric sweeteners. For manufactured tobacco, the specific tax rose to 0.8516 pesos per cigarette for 2026 and is programmed to step gradually to 1.1584 pesos by 2030.

The Finance Ministry has presented the measures as a way to discourage consumption linked to obesity, diabetes and smoking-related diseases, while boosting revenues to fund health and social programs. The 2026 budget projects IEPS revenue of roughly 761 billion pesos, a marked increase from previous years.

Public health advocates have welcomed the higher prices on health grounds. Retailers and industry groups have been more critical, particularly in the tobacco market, where illegal sales are already widespread.

The National Alliance of Small Retailers, known by its Spanish initials ANPEC, says about three in 10 cigarettes sold in Mexico are illicit and warns that higher legal prices—now above 100 pesos per pack in many cases—are pushing consumers toward contraband that can sell for around 75 pesos. In comments reported by local media, the group has argued the tax hikes “give wings” to the black market and place small neighborhood shops “in check” as they lose customers to informal vendors.

From the central bank’s perspective, such excise increases feed directly into the consumer price index basket, adding to headline inflation even if consumption volumes later fall.

A tariff wall’s inflationary side effects

The second major policy shift confronting Banxico is Mexico’s new tariff regime for imports from Asia and other nontraditional suppliers.

Following congressional approval in December, the government raised import duties to between 5% and 50% on more than 1,400 tariff lines across 17 sectors, including textiles, footwear, steel, plastics, auto parts and consumer electronics. The tariffs apply primarily to China but also affect countries such as India, South Korea, Thailand, Russia, Turkey and Brazil that lack free trade agreements with Mexico.

Officials say the move is part of an industrial strategy to protect an estimated 350,000 domestic jobs from what they describe as unfair competition, while capturing as much as 70 billion pesos in additional customs revenue. The measures also position Mexico closer to U.S. efforts to reduce dependence on Chinese supply chains ahead of a scheduled review of the United States-Mexico-Canada Agreement in 2026.

China has publicly urged Mexico to “correct” what Beijing has called a tariff wall and has warned of potential consequences for bilateral trade.

For Banxico, the tariffs translate into higher prices on imported consumer goods and intermediate inputs, some of which are key components in Mexican manufacturing and export industries. Those higher import costs tend to be passed through, at least partially, to factory-gate prices and eventually to retail shelves.

In minutes of its December meeting, the bank said the combined effect of the IEPS changes and the tariff increases would be largely mechanical and temporary, but significant enough to delay the return to target.

Weak growth, cautious central bank

The policy dilemma is sharpened by a fragile economic recovery. Official figures showed Mexico’s economy contracting in the third quarter of 2025 before posting a modest rebound in the final quarter. Capital spending has been under pressure, with investment data earlier last year indicating sizable quarterly and annual declines.

Previous rate cuts were partly justified by a softening labor market and tepid real wage gains. Those conditions persist, although they have not deteriorated dramatically. The bank also noted external risks from global trade tensions and conflicts that could weigh on exports and investor confidence.

Against that backdrop, markets had largely anticipated a pause in February, viewing December’s move to 7% as the last straightforward cut before fiscal-driven price shocks took hold. The peso traded around 17.25 to the dollar before the decision and weakened modestly afterward as investors recalibrated expectations for the pace of future easing. Mexico’s main stock index was little changed.

With inflation just below 4% and the policy rate at 7%, Mexico still offers a positive real interest rate and comparatively attractive returns versus major advanced economies, helping to support the currency and local debt markets.

What comes next

The central bank did not declare an end to its easing cycle and left the door open to further reductions if inflation behaves broadly in line with its new forecast and the recent tax and tariff shocks prove as short-lived as expected.

Analysts say that could mean a slower, more cautious path of cuts in the second half of 2026, depending on incoming data and on global monetary conditions, including the trajectory of U.S. Federal Reserve policy.

For now, Mexico enters 2026 with lower interest rates than a year ago but with a longer road back to price stability. The government’s push to reshape consumption and trade through higher taxes and tariffs has given the central bank new variables to watch—and forced it to put its rate-cutting campaign on hold while it measures the inflationary cost of those choices.