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Mexico Is Closer to a Rate Cut as Second Member Eyes Easing

Mexico Is Closer to a Rate Cut as Second Member Eyes Easing

(Bloomberg) -- Mexico’s central bank is moving closer to a rate cut after one board member voted to ease and another said if inflation keeps slowing lower borrowing costs may be needed soon.

Gerardo Esquivel was the only member of the five-person board to vote for a rate cut of a quarter point, according to the minutes of the June 27 rate decision published on Thursday. The rest of Banxico, led by Alejandro Diaz de Leon, had voted to keep rates steady at a decade high 8.25%.

“There’s a risk of maintaining an overly restrictive monetary position for a prolonged period at the expense of economic growth, public finances and financial costs,” said the second member, who had voted along with the rest of the board to stay on hold, according to the minutes. “While the reference rate shouldn’t be adjusted on this occasion, the statement should have a less restrictive tone.”

Mexico’s economy has weakened in 2019 even as inflation has remained above the central bank’s target, while worries about credit downgrades at state oil company Pemex and threats of tariffs on domestic goods have hurt the peso. Budget cuts by President Andres Manuel Lopez Obrador, declining investment due to uncertainty about his policies and worries about trade relations with the U.S. have exacerbated a slowdown in Mexico’s economy that Bank of America estimates is already in recession.

One Banxico member said in the minutes that some data suggest Mexico has entered a slight recession after contracting in the first quarter.

While two of the five members are expressing a dovish stance, the majority is still raising concern about high core inflation and a deeply uncertain global environment, hinting at a clash brewing over rates at an institution traditionally known for unanimous decisions. There’s also some pressure from Lopez Obrador, who has promised to respect Banxico’s autonomy, but also vowed to turn around Mexico’s record of low growth and instead is saddled with an economy forecast to expand this year by the slowest in a decade.

Most economists see rates on hold until November, according to a Citibanamex poll, and the abrupt resignation of Mexico’s finance minister Carlos Urzua on Tuesday, who was immediately replaced by his deputy Arturo Herrera, damped prospects for an easing cycle even further. Natixis, on the other hand, forecasts monetary easing by September, citing Federal Reserve signals that it’s open to cutting rates this month.

“Urzua’s resignation decreases marginally the probability of a cut” said Benito Berber, chief economist at Natixis. “However, the market positive reception to Herrera coupled with a very dovish Fed seemed to have minimized the negative impact of Urzua’s resignation on the peso.”

To contact the reporters on this story: Nacha Cattan in Mexico City at ncattan@bloomberg.net;Michael O'Boyle in Mexico City at moboyle7@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, ;Walter Brandimarte at wbrandimarte@bloomberg.net, Carlos Manuel Rodriguez

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