The premature relaxation of monetary policy in Mexico without having achieved convergence towards the 3% inflation goal has caused Banxico’s loss of credibility, according to an analysis by Moody’s Analytics.
“Neither the market nor the analysts believe in the effectiveness of the current monetary policy to achieve the inflation objective,” the firm’s director for Latin America, Alfredo Coutiño, said in a report.
In the analysis, dated Tuesday, the economist pointed out that there are three factors that allow us to maintain that the current monetary policy is not credible and, therefore, is ineffective in fulfilling the constitutional mandate of achieving low and stable inflation, anchored to the central objective of 3%.
He stressed that underlying inflation is the indicator that should guide the central bank’s monetary decision-making, and not general inflation, which is subject to constant variability generated by the volatile prices of certain goods and services.
Lee: General inflation in Mexico slows in December; underlying remains above target
He explained that the first factor behind the lack of credibility is the premature withdrawal of the monetary brake throughout the year, given the supposed rush of the authorities to help the economy emerge from its prolonged weakness.
This caused an incomplete monetary adjustment, since the premature easing did not eliminate the demand pressures generated by excess monetary liquidity, which hindered the convergence of underlying inflation towards the central objective of 3%.
The withdrawal of the monetary brake accelerated in 2025, when Banxico cut its key interest rate by 300 basis points, compared to a 125-point cut in 2024.
As a result, he added, the monetary restriction completely disappeared as of September 2025, when the real reference rate (adjusted for expected inflation) reached the upper limit of neutrality and monetary conditions entered net neutral territory as of the last quarter of the year.
You may be interested: Sheinbaum says that inflation ‘is controlled’ and celebrates Banxico’s rate cut
He stated that the premature relaxation, without inflationary convergence, reduced the credibility of Banxico’s commitment.
The second factor that reflects distrust in Banxico is the deterioration of market inflation expectations.
Although analysts anticipated cuts to the reference rate, based on the preferences revealed by the majority of deputy governors, their expectations do not foresee that the 3% inflation goal will be reached by the end of 2026.
Banxico continues to expect general inflation to converge to the 3% goal in the third quarter of this year.
Coutiño added that the third factor is the “persistent gallop” of core inflation in 2025, which accelerated as the rate cuts increased in magnitude.
The underlying component not only did not decrease, but even increased, from 3.7% at the end of 2024 to 4.3% at the end of 2025.
“Therefore, it is no coincidence that core inflation remained above 4% in the second half of 2025, when monetary policy became accommodative,” he noted.
The above implies, according to the analysis, that current monetary conditions have completely lost their effectiveness against inflation, which contributes to reinforcing the lack of credibility of Banxico’s monetary policy to achieve inflationary convergence.
According to Coutiño, to achieve inflation convergence and, consequently, restore credibility, the central bank needs to “take a turn” and reverse the reductions in the reference interest rate.
Tightening monetary conditions would return the real interest rate to restrictive territory.
Anchoring core inflation around 3% would imply maintaining monetary restriction for the time necessary to eliminate excess demand.
“The monetary reversal would not only achieve inflationary convergence, but would also allow Banxico to restore its credibility by endorsing, in fact, its commitment to the single mandate of price stability,” he noted.
Do you like to get informed through Google News? Follow our Showcase to have the best stories