Mexico Central Bank Seen Cutting to Catch Up: Decision Day Guide

(Bloomberg) -- After years of maintaining some of the world’s tightest money, Mexico’s central bank is a late arrival at the global easing party. Now investors want to know how enthusiastically it will join in.

Most forecasters say the bank will stick with incremental steps Thursday -- lowering the benchmark interest rate by a quarter-point for a second straight month, to 7.75%.

But with inflation at a three-year low, the economy near recession and real rates among the world’s highest, analysts from BNP Paribas and Goldman Sachs Group Inc. are among those who suggest a more aggressive move is possible.

“The discussion is around what type of cuts they’re going to do -- gradually by 25 points at a time, or a more front-loaded approach,” said Joel Virgen, chief Mexico economist at BNP, who expects a half-point reduction.

Inflation slowed to meet the bank’s 3% target this month. It’s likely to stay around that level for a while before picking up again in 2020, Virgen said, “so the window is open for the rest of this year.”

MEXICO INSIGHT: Global Uncertainty, Domestic Demand Limit Growth

Mexico’s policy makers may also give some guidance Thursday as to whether they see themselves in a cutting cycle, language the central bank avoided when it lowered interest rates last month for the first time in five years. Economists expect the rate to be 7% by the end of next year.

Even with a half-point cut, the benchmark would still be near a 10-year high -- and Mexico would still be a global outlier.

It currently has the second-highest real interest rate (the gap between the policy rate and inflation) among the world’s biggest economies, exceeded only by crisis-stricken Argentina.

If Banxico does surprise with a bigger-than-expected cut, it would mark a departure from the past several years.

The bank raised interest rates more than any of its G-20 peers after the Federal Reserve began hiking in 2015 –- worried that the peso could plunge without a generous cushion.

Even so, the currency took a hit of some 15%, driving inflation to the highest level in years, as newly elected President Donald Trump’s belligerence toward Mexico alarmed investors.

Concern about the peso’s fragility hasn’t disappeared, but the case for tight money is weakening as the economy slows. Analysts expect growth of just 0.5% this year, the lowest in a decade.

One reason the central bank may be hesitant about a bigger cut is core inflation, which excludes food and energy. That hasn’t come down as much as headline prices.

There are also uncertainties stemming from trade tensions abroad, and President Andres Manuel Lopez Obrador’s policies at home. Banxico has blamed both for holding back investment.

Still, low growth, slowing inflation and an easing Fed -- as well as rate cuts in regional countries like Brazil and Chile -- are aligning to allow for a half-point reduction, according to BBVA Bancomer analysts including Ociel Hernandez.

“Banxico has room to deliver a bolder cut,” they wrote. “The question is whether the board is ready to speed up the cycle or not.”

To contact the reporter on this story: Eric Martin in Mexico City at emartin21@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Ben Holland, Robert Jameson

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