Mexico Slows Rate Cut Pace as Easing Cycle Nears End

(Bloomberg) -- Mexico’s central bank cut its key interest rate by a quarter point, the least since February, in a sign the current monetary easing cycle is nearing its end after inflation sped past target.

Banco de Mexico, led by Governor Alejandro Diaz de Leon, unanimously voted to lower borrowing costs to 4.25%, in line with 18 of 23 estimates in a Bloomberg survey. Four economists expected the bank wouldn’t chop rates while one thought it would deliver another half-point cut, the same pace of the previous five decisions.

The decision was based on inflation forecasts that gave it “limited” space to cut further, policy makers said in a statement.

Banxico, as the bank is known, has the unenviable task of keeping inflation under control while analysts expect the economy to plunge 10% this year, without fiscal stimulus from the government.

“From my point of view, and since we expect inflation to remain above 4%, the easing cycle is over,” Marco Oviedo, Chief Latin America Economist for Barclays, said before the decision. “Banxico will continue data dependent, waiting to see more developments.”

What Our Economist Says

“Policy makers explicitly acknowledged that room for additional accommodation is limited. This is consistent with current lower interest rates after a significant adjustment in the past twelve months, high uncertainty and concerns about resilient inflation. It is likely to temper expectations for additional easing, but does not mean the easing cycle is over. Future decisions still depend on new information and the outlook suggests there could be room for more reductions.”

-- Felipe Hernandez, Latin America economist, Bloomberg Economics

MEXICO REACT: After Cut, Banxico Signals Limited Room for More

Inflation has almost doubled since April, hitting 4.10% in early September from a year ago and hampering Banxico’s room for maneuver. A surge in food prices pushed it above the upper limit of the central bank’s target range for the first time in 15 months in August.

The bank added that “uncertainty” and downside risks prevail, even as the economy began recovering in June and July. Inflation and the tough economic climate will pose large monetary policy challenges going forward, it said in the statement, though it expects inflation to stabilize close to its 3% target in the medium to longterm.

The unanimous decision “leaves the door open for more cuts if necessary,” said Andres Abadia of Pantheon Macroeconomics, who thought another cut was possible in November.

While the country’s real interest rates remain positive when inflation is discounted, Banxico faces a “worrisome” combination of coronavirus shocks and uncertainty around the government’s minimum wage and gasoline-pricing policies, said Jessica Roldan, an economist at Mexican brokerage Finamex.

The bank has now lowered rates 11 times since August 2019 from 8.25%, the longest easing streak since Mexico formally adopted an operating interest rate target in 2008.

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