Mexico's central bank, Banxico, held its key interest rate steady at 7% on Thursday. This decision halts an easing cycle that began nearly two years ago. The move aligns with analyst expectations. Core inflation remains above the bank's target range of 3%, plus or minus 1 percentage point, prompting the pause in rate cuts.

Annual inflation in Mexico rose to 3.77% in early January, up from 3.66% in late December. Of greater concern is core inflation, which excludes volatile food and fuel prices, which climbed to 4.47%. Banxico's monetary policy committee will also consider the inflationary effects of new government tariffs on Asian goods.

Banxico started its monetary easing cycle in March 2024, when the lending rate was 11.25%. The central bank expects the tariffs and new taxes to have a limited impact on prices. Investors are closely watching Banxico's next moves, as the central bank navigates a path to balance growth and manage inflationary pressures.

This decision is critical for the Mexican economy, which is still recovering from the pandemic. Higher interest rates can curb inflation but also slow economic growth. Further, the central bank’s actions are closely watched by other emerging market economies grappling with similar challenges of rising prices.