Mexico's Peso Gained 16% Last Year. Now the Central Bank Is Cutting Rates Anyway. Here Is the Logic.
The Mexican peso was one of the best performing currencies in the world in 2025, appreciating almost 16% against the US dollar in what analysts nicknamed the superpeso rally. That made Banco de Mexico's decision in March 2026 to resume cutting interest rates, reducing its benchmark rate by 25 basis points to 6.75%, look counterintuitive at first glance. A weaker policy stance would typically be expected to weaken a currency, not strengthen it further.
The logic becomes clearer when you look at what was actually driving the peso's strength. The superpeso rally was powered by three forces working together: Mexico's high nominal interest rates relative to developed economies, record nearshoring driven foreign direct investment as companies relocated manufacturing closer to North American markets, and a broadly weaker US dollar. Even after the March cut, Mexico's interest rate differential with the United States remains around 300 basis points, still attractive enough to sustain meaningful carry trade activity.
Inflation data supports the case for continued gradual easing. Mexico's annual inflation rate eased to 3.94% in the second half of May 2026, down from 4.45% in April, marking the lowest reading in four months and bringing the figure back within Banxico's tolerance band of one percentage point around its 3% target. The real ex ante interest rate, which measures the nominal rate minus expected inflation, stood at 2.94% in January 2026, comfortably within the central bank's neutral range of 1.8% to 3.6%.
The peso has softened somewhat from its February 2026 multi year high near 17.10 per dollar, trading closer to 18.10 by the end of March, still roughly 11% stronger than a year earlier. BBVA Research and consensus forecasts expect Banxico to continue cutting gradually toward a terminal rate of 6.50% by the end of 2026.
The biggest swing factor for the peso's direction from here is not monetary policy at all. It is the ongoing review of the USMCA trade agreement, which most institutional forecasters say represents the binary risk that could determine whether the peso holds its gains or gives them back through the rest of the year.
