Banxico holds at 6.5% as its cushion over the Fed shrinks to 2.5 points and the peso slides to 17.58

The Bank of Mexico kept its benchmark rate at 6.50% on Thursday, its third straight hold, in a unanimous vote of its five-member board, Investing.com reported. Economists polled by Reuters had widely expected no change. Bloomberg also reported the hold.

Headline inflation rose to 3.42% in early September, while core inflation eased to 3.79%, according to Investing.com. The central bank said the balance of risks to inflation is still tilted upward and noted that Mexican government bond yields rose and the peso turned more volatile after the Federal Reserve's recent tightening.

The gap that matters

For traders, the key number is not 6.50% on its own but how far it sits above U.S. rates. The Fed raised its target range to 3.75%-4% last week, as we reported here. That leaves Banxico's rate 2.50 percentage points above the top of the Fed's range.

That spread is what makes the "carry trade" work: borrowing in dollars and holding peso assets pays the difference in rates, as long as the peso does not fall by more. When the gap narrows, the trade pays less, and the peso loses a source of support.

The currency has moved accordingly. On the European Central Bank's daily reference rates, the dollar bought 16.90 pesos on Sept. 4 and 17.58 on Sept. 24, a 4% gain for the dollar in under three weeks. Almost half of that move came in the last two sessions, from 17.25 on Tuesday, as markets priced in the Fed hike.

The target keeps moving

Banxico now projects headline inflation will return to its 3% goal in the fourth quarter of 2027, Investing.com reported. In its June decision, the bank expected to reach target by the second quarter of 2027, Mexico Business News reported at the time. That is a six-month delay in three months, with no change in the policy rate. It explains why the bank is holding rather than cutting, even as growth slows.

Who it hits

The peso move matters most for U.S. businesses that trade with Mexico, and it cuts both ways:

• A U.S. importer paying a Mexican supplier in pesos gets a discount. A 1 million peso invoice cost about $59,180 at the Sept. 4 rate and about $56,870 at Thursday's, roughly $2,300 less.
• A U.S. exporter pricing in dollars is more expensive for Mexican buyers. The same $10,000 order costs a Mexican customer about 175,800 pesos now, against 169,000 on Sept. 4.
• Families and workers sending money home get more pesos per dollar, about 4% more than at the start of the month.

Anyone locking in cross-border prices for the holiday season should know that the rate cushion behind the peso has narrowed to 2.5 points. If the Fed hikes again in October, it gets thinner still unless Banxico follows. Banxico said future decisions will depend on domestic slack, currency pass-through and inflation expectations, not on automatically following the Fed.

Sources: Investing.com; Bloomberg; Mexico Business News; European Central Bank reference rates. Currency and invoice figures are Chronicle calculations from ECB reference rates. This is market information, not investment advice.