Mexico Cuts Key Rate by a Quarter Point Amid Banxico’s Divisions
Mexico Cuts Key Rate for Second Month as Inflation Slows to Goal
(Bloomberg) --
Mexico’s central bank cut borrowing costs costs by a quarter point for the second straight month amid moribund economic growth, with two members voting for a faster pace of monetary easing.
The board, led by Governor Alejandro Diaz de Leon, lowered the benchmark rate to 7.75%, as forecast by 22 of 25 economists surveyed by Bloomberg, after cutting it for the first time in five years in August. Two projected a larger half-point cut, and one expected no change.
The central bank said that the risks for the economy remain biased toward slower-than-expected growth after Mexico narrowly escaped recession in the first half of year. Still, policy makers said that the inflation outlook is hard to predict. The board stopped short of declaring an easing cycle, saying it will be focused on the currency’s impact on inflation, the Federal Reserve, economic slack and cost pressures.
The decision and split vote “support expectations for policy makers to continue cutting interest rates,” said Felipe Hernandez, an economist at Bloomberg Economics. “However, lingering uncertainty about risks to inflation imply that the majority of the board would remain inclined for cuts of only 25 basis points.”
It was the first 3-2 split vote for Banco de Mexico since June 2014, when only one of the current members, Javier Guzman, was on the board. The participants voting for a half-point cut probably were Jonathan Heath and Gerardo Esquivel, the two appointed by leftist President Andres Manuel Lopez Obrador, and the market debate will focus on the speed of easing in future decisions, said Alonso Cervera, the chief Latin America economist at Credit Suisse Group AG.
The peso maintained its loss following the decision, dropping 0.4% to 19.6479 per dollar at 2:23 p.m. local time.
Monetary policy remains restrictive after Thursday’s cut, with the key rate not far from a recent 10-year high. At more than 4%, Mexico still has the second-highest real interest rate, that is borrowing costs minus inflation, among the world’s biggest economies, trailing only crisis-stricken Argentina. Consumer prices rose an annual 2.99% in early September, the least in three years and just below the central bank’s 3% goal.
MEXICO REACT: Banxico Follows Gradual Easing Path, More to Come
The Fed last week lowered its main interest rate for a second time this year. Futures traders expect another 25 basis-point cut in the U.S. before the end of the year. Mexico joins central banks in Latin America from Brazil to Chile in cutting borrowing costs.
At their August meeting, some central bank members warned about the weakness of investor confidence in Mexico. One highlighted the impact from the cancellation of an airport for Mexico City, suspension of private partnerships for state-owned oil company Petroleos Mexicanos and a dispute with natural gas pipeline firms.
Mexico’s economy is forecast to grow 0.5% this year, the least in a decade, according to the median estimate in a Bloomberg survey.
Analysts from BNP Paribas to Goldman Sachs Group Inc. said prior to the decision that policy makers might be more aggressive and cut by a half percentage point. But one factor of recent concern for the central bank has been core inflation, which excludes food and energy. That hasn’t come down as much as headline prices, and the central bank highlighted it again in Thursday’s statement. It was one of the reasons that deputy Governor Javier Guzman dissented from the August cut.
--With assistance from Rafael Gayol and Nacha Cattan.
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, Robert Jameson
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