Mexico’s Hawkish Central Bank Gets Swamped With Rate-Cut Signals

(Bloomberg) -- Even for the famously hawkish Central Bank of Mexico, the latest inflation numbers are pointing the way to lower interest rates.

Consumer prices rose an annual 2.99% in early September, the national statistics agency said Tuesday, the lowest in three years. That comes after the economy barely avoided sliding into recession in the second quarter.

The slowdown on all fronts strengthens the case for policy makers to extend last month’s cut, the first in five years -- which still left Mexico with some of the world’s highest real interest rates. Despite the August reduction, Banxico refrained from declaring the start of an easing cycle.

The central bank, which is due to announce its rate decision on Thursday, has lagged the world in lowering borrowing costs. At 8%, its benchmark rate is now 5 percentage points higher than inflation – at a time when many emerging-market peers are offering very low or even negative real rates.

That gap could even widen without additional easing. Prices are likely to cool further, according to John Ashbourne, senior emerging markets economist at Capital Economics. He expects the bank to cut by a quarter-point this week, in line with the median forecast in Bloomberg’s survey, and another 75 basis points by mid-2020.

“The trend of easing headline inflation probably has further to run,” driven by slowing fuel prices, Ashbourne wrote in a research note after today’s data was released.

Mexico’s economy is forecast to grow 0.5% this year, the lowest in a decade, according to the median estimate in a Bloomberg survey, following an unexpected contraction in the first quarter and zero growth in the second quarter. The central bank has blamed uncertainty stemming from the international trade war and decisions taken by the government of new President Andres Manuel Lopez Obrador for holding back investment.

From the previous two weeks prices increased 0.17% in early September, below the median 0.21% forecast in a Bloomberg survey. Meanwhile core prices, which exclude food and energy, rose 0.19%, also below estimates. They rose 3.78% from a year earlier.

What Our Economist Says

“Results maintained the same trend from previous data. They showed abating headline inflation driven by lower non-core prices, but resilient and still high core inflation. Average headline and core inflation are slightly higher than central bank expectations in the third quarter, but should not be an obstacle for the central bank to cut interest rates again in the next monetary policy meeting.”

--Felipe Hernandez, Bloomberg Latin America economist

The central bank targets inflation at 3%, plus or minus one percentage point.

--With assistance from Rafael Gayol.

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

©2019 Bloomberg L.P.