Banxico Faces Credibility Crisis Amidst Rising Inflation Woes

Mexico - Banco de México (Banxico) is currently navigating a turbulent economic landscape marked by persistent inflation that defies expectations. On July 11, 2025, El CEO reports that the central bank’s credibility is under scrutiny, especially in light of comments from Subgovernor Jonathan Heath Constable. He expressed that recent monetary policy decisions may send a message of complacency, particularly as inflation forecasts are not being met.

The latest adjustments have raised medium-term inflation expectations, with forecasts for Q3 climbing from 3.5% to 4.1% and for Q4 from 3.3% to 3.7% annually. This shift adds pressure on Banxico, which aims to hit its inflation target of 3.0% by Q3 2026. Market analysts, however, are predicting a general inflation rate of around 3.74% for 2026, suggesting the central bank might need to rethink its figures yet again.

Policy Decisions and Debate

As Banxico assesses its future strategies, the discussion revolves around whether to hit the brakes on interest rate cuts or continue with cautious reductions. El Financiero elaborates that the Board of Governors has acknowledged that the era of 50 basis point cuts may be drawing to a close. Analysts expect a 25 basis point cut during the decision meeting on August 7, which could lower the reference rate from 8.0% to 7.75%.

Interestingly, the June 26 meeting minutes revealed diverging opinions among board members. Four of the five members justified the previous cut, attributing it to economic weakness and fading price shocks. However, dissenting voices, including Heath Constable, suggested maintaining rates could uphold credibility amidst growing inflationary pressures.

According to analysts from Banamex, a series of three 25 basis point cuts could see rates settle at 7.25% by year’s end, relying on a clear downturn in inflation as a benchmark. Banorte also notes a growing dovish tone among Banxico members, favoring continued but limited rate cuts.

Challenges in Achieving Stability

The current situation isn’t unique to Mexico. The challenges faced by Banxico reflect broader trends observed globally in monetary policy. The inflation-targeting framework is a common approach, but as highlighted by CEPR, it is not without its difficulties. Many central banks, despite successfully anchoring inflation expectations, have struggled to maintain stability, particularly in the wake of high inflation rates and the expansion of balance sheets post-2008 financial crisis.

The limitations of this framework can also contribute to the perception of central banks’ credibility. For example, while Banxico strives for price stability, rising interest rates alongside high public and private debts complicate its efforts. Thus, the balance between fostering economic growth and curbing inflation remains delicate.

In conclusion, Banxico’s upcoming policies will be under keen scrutiny. As the central bank works to navigate the choppy waters of inflation and credibility, the choices it makes in the coming months will be critical not just for the economy but also for public confidence in its monetary policy.