Mexico Holds Key Rate in Surprise Pause to Easing Cycle

(Bloomberg) -- Mexico’s central bank surprised markets by halting a record monetary easing cycle that has lent one of the few supports to an economy expected to contract nearly 10% this year.

Banco de Mexico, led by Governor Alejandro Diaz de Leon, voted 4-1 to hold borrowing costs at 4.25%, after inflation held above the bank’s target ceiling for three straight months. The Mexican peso briefly trimmed losses after the decision, which was expected by only six of 22 economists surveyed by Bloomberg. Sixteen of them forecast a quarter-point cut.

“This pause provides necessary space to confirm a path for inflation to converge to its goal,” bank board members wrote in a statement accompanying the decision. “Going forward, monetary policy will depend on the evolution of factors that affect headline and core inflation.”

President Andres Manuel Lopez Obrador has rejected a large fiscal stimulus of the kind implemented by most of Mexico’s peers, arguing that lower debt will hasten the recovery.​ That’s left the central bank to do the heavy lifting in fighting the sharpest contraction since the Great Depression of the 1930s, slashing rates from 8.25% over 11 straight meetings beginning in August 2019.

It was the longest easing streak since Mexico formally adopted an operating interest rate target in 2008. But annual inflation has almost doubled since April, hitting 4.09% in October, the third straight month above the 4% ceiling of the bank’s target range.

What Bloomberg Economics Says

“Mexico’s easing cycle is not over, but policy makers are unlikely to consider any additional reductions until they have evidence that inflation is effectively slowing. Improving financial conditions would provide more flexibility and weak economic growth argues for more accommodation but, absent lower inflation, these are unlikely to result in the central bank cutting rates.”

-- Felipe Hernandez, Latin America economist

For the full note, click here

“The door for rate cuts is closed, at least for now as Banxico says this is a pause to give inflation space to confirm its trend toward the target,” said Carlos Capistran, a New York-based economist with Bank of America Corp. “We continue to believe that inflation will remain relatively high next year and will limit Banxico’s room to cut.”

The unexpected hold left some in the market scratching their heads over the bank’s guidance. The rise in prices has been driven by surging food costs across emerging markets and private sector inflation expectations for next year are at 3.6%, leading most analysts to think the bank had slightly more leeway to cut.

Read More: Food-Price Shock Thwarts Central Banks Fighting Historic Slump

“It seems that we are not understanding well the central bank communication. We will have to read today’s meeting minutes even more carefully,“ said Gabriel Casillas, chief economist at Mexico’s second-biggest lender, Banorte. “All the stars were aligned for a rate cut” and so “with an extremely limited fiscal support to tackle the pandemic, it seemed like a must do.”

While the economy returned to growth in the third quarter, the bank painted a far-from-cheery picture of its overall state. “It remains below the levels prior to the pandemic in an environment of uncertainty and downward risks,'' the board said in the statement.

©2020 Bloomberg L.P.