Banxico decoupled from the Fed, and the Mexican peso had its worst losing streak since 2019

What Banxico decided

On September 24, the Governing Board of the Bank of Mexico unanimously held the benchmark rate at 6.5%, the level at which it has stood since May. It was the third consecutive decision without a change.

What drew attention was the statement. The bank removed the phrase indicating that it would keep the rate at the current level and added another: because conditions in Mexico differ from those in the United States, monetary policy would not have to react mechanically to the adjustments expected in the U.S. rate. From then on, it said, it will decide by looking at inflation, slack in the economy, expectations and the pass-through of the exchange rate to prices.

The minutes of the meeting, published on October 8, went further. Three of the five board members said they were willing to evaluate another cut if inflation keeps receding; one of them spoke of a fine-tuning downward, so that interest rates that are too high do not hold back the recovery. Only one argued for keeping the rate for a prolonged period and warned that it might be necessary to discuss following the Fed's cycle of hikes.

What the Fed had done

A week earlier, on September 16, the Federal Reserve raised U.S. interest rates by 0.25 percentage point, to the range of 3.75% to 4%, in the face of inflation driven by energy since the war with Iran. The Fed's own projections pointed to one more hike still in 2026.

The decision narrowed the gap between the two countries' interest rates. According to the Institute of International Finance, the differential came to 2.5 percentage points, the narrowest on a sustained basis since 2008. That gap supported an operation known as the carry trade: borrowing in dollars, at low interest rates, and investing in pesos, at high interest rates. With the margin smaller and the market more volatile, staying in pesos became less rewarding.

What happened to the peso

In our daily series, the dollar cost 16.88 pesos on September 5, the peso's best level of the year. On the eve of the Fed decision, it stood at 17.15; on the eve of the Banxico decision, at 17.54; at the end of September, at 18.08. By the central bank's official data, the peso lost 6.38% in the month, the largest monthly drop since June 2024.

The decline continued in October and accelerated on the day of the minutes: on October 8, the peso fell 1.22%, the emerging-market currency that lost the most value in the session. On October 16, it closed at 18.50 per dollar by the official rate, extending six weeks of depreciation, the worst streak since 2019. Since September's best level, the loss is 9.54%.

The dollar strengthened worldwide over the period, but that explains only part of the move: in our series, the dollar index against major currencies rose 2.4% between August 31 and October 16. Among the five Latin American currencies we track daily, the Mexican peso was the one that lost the most value over the same interval — 8.7%, against 5.4% for the Chilean peso and 4.2% for the Peruvian sol. The real and the Colombian peso ended the period stronger than they began.

An analyst interviewed by the Mexican press recalls that the interest-rate differential alone hardly explains the speed of the fall: insurance against default on Mexican debt also became more expensive, and the U.S. discussion about banning diesel exports weighed in the same days. In mid-October, the agency HR Ratings downgraded the country's sovereign credit rating.

Why the bank accepts it

Governor Victoria Rodríguez explained the logic in an interview. The United States has a strong labor market and demand-driven inflation; Mexico is operating with idle capacity, and fuel subsidies cushioned the energy shock there. The flexible exchange rate, she said, exists to absorb external shocks, and the pass-through of depreciation to prices tends to be low as long as the economy has slack.

The inflation numbers give some support to that argument. In September, annual inflation rose to 3.45%, driven by tomatoes and onions, but core inflation — which excludes the most volatile items — fell to 3.75%, and goods inflation, the most sensitive to the exchange rate, was at 3.21%. All within the tolerance range of 2% to 4%. The bank projects reaching the 3% target in the fourth quarter of 2027.

Where the bet may fail

The bank itself listed the peso's depreciation among the upside risks to inflation. A market estimate calculates that the fall since September could add 0.46 percentage point to inflation over the next twelve months, mainly through imported goods. Producer prices were already rising 4.05% a year in September.

There is also the cost of financing. At the Treasury bond auction of September 29, rates rose across nearly all maturities, and the gap between the shortest and the longest reached 1.43 percentage points. HR Ratings estimates that the depreciation raises public debt from 54% to 55% of GDP.

And there is precedent. In December 2015, Banxico raised rates the day after the Fed; in February 2016, with the peso under pressure, it made an extraordinary hike of 0.5 percentage point. An economist at the Institute of International Finance summed up the dilemma: the bank will not copy every Fed hike, but the peso is precisely the variable that could force it to raise.

Reading

Banxico is not wrong to say that Mexico is not the United States. Core inflation is falling and the economy is growing little. What changed the picture was less the September 24 decision than the signal of cuts that came in the minutes, at a moment when the market was already demanding more to stay in pesos.

The November 5 decision will show whether the declared independence holds with the currency 9.5% weaker than in September. If the depreciation begins to show up in prices, the bank will have to choose between consistency with what it said and defense of the currency.