Mexico Central Bank Divided in Decision to Keep Rate Steady
Mexico Keeps Interest Rate Unchanged at 8.25% as Risks Abound
(Bloomberg) -- Mexico’s central bank was divided in its decision to keep the key interest rate at a decade high Thursday, with one board member voting for a quarter-point cut as the economy sputters.
The bank held the benchmark rate at 8.25%, as forecast by all 23 economists surveyed by Bloomberg. The board highlighted risks for renewed financial asset volatility due to uncertainty over the trade relationship with the U.S. and the credit outlook for state-owned Petroleos Mexicanos and the nation’s sovereign debt, while saying that the uncertainty for growth and risks to the downside increased.
The statement didn’t say which of the five members voted for the reduction, though analysts speculated that it was Gerardo Esquivel, who has dissented from the board’s recent restrictive tone in communications. Policy makers in their statement Thursday removed a warning about inflation risks being biased to the upside.
There’s a consensus building that the U.S. will join central banks from Chile to Australia and cut rates next month amid prospects of slower global growth, and while analysts have been expecting no change from Mexico through year-end, the board may be preparing the way for an eventual reduction, said Alberto Ramos, the chief Latin America economist at Goldman Sachs Group Inc.
‘Incremental Half Step’
"They added a few dovish tweaks here and there, including the dissenting vote, showing a more realistic characterization of the weak real sector dynamics," Ramos said. "It’s kind of an incremental half step towards easing, depending on incoming information."
The peso maintained its loss, falling 0.1% to 19.1389 per dollar at 2:06 p.m. in Mexico City.
Deputy Governor Jonathan Heath, appointed last year by President Andres Manuel Lopez Obrador, earlier this month said Mexico shouldn’t cut rates while Trump’s threats persist. The U.S. president’s surprise late-May demand that Mexico do more to stop undocumented migrants or face 5% duties on its goods sent the peso to a six-month low.
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Annual inflation hasn’t been significantly below the 4% upper limit of the central bank’s target range since the end of 2016. Core inflation, which excludes more volatile food and energy prices, was 3.87% in the first half of June, near the highest since March 2018.
Credit Outlook, Growth
Despite an agreement on migration that avoided the tariffs, Mexico needs to consider them as an "almost permanent threat," Heath said in an interview with Bloomberg this month. This danger "is a permanent possibility as long as Trump is in power," he said.
Inflation expectations remain above Banco de Mexico’s objective. The 10-year breakeven rate, a bond market proxy for cost of living prospects during the next decade, is 4.17%.
Other looming risks include the possibility that more ratings agencies downgrade Petroleos Mexicanos, known as Pemex, and possibly Mexico itself, after cuts to both by Fitch Ratings this month. Moody’s Investors Service also shifted its outlook on Mexico’s rating to negative.
Analysts expect Mexico’s gross domestic product to increase 1.2% this year, based on the median forecast in a Bloomberg survey. Barclays Plc sees growth of just 0.5% in 2019, the least since the 2009 financial crisis.
"We still believe interest rate cuts this year are likely, but expect policy makers to wait until inflation is lower before moving," said Felipe Hernandez, a Latin America economist at Bloomberg Economics.
--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, Robert Jameson, Matthew Malinowski
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