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Mexico On Verge of First Rate Cut in 5 Years: Decision Day Guide

Mexico On Verge of First Rate Cut in 5 Years: Decision Day Guide

(Bloomberg) -- Mexico’s central bank is the closest to cutting interest rates since it last did so five years ago. The question economists are now asking isn’t if, but when, and timing is key.

Analysts are split almost down the middle between forecasting whether Banxico will lower its key rate Thursday, or keep it at a decade-high 8.25%, even if just for a little while longer. Sixteen see the central bank on hold, 14 see a quarter-point cut and one sees a half-point reduction, the closest they have come to predicting a reduction since the last one took place in 2014.

Mexico On Verge of First Rate Cut in 5 Years: Decision Day Guide

The decision is bound to be divisive. Two of five board members expressed a dovish stance in the previous communique in June, while the majority raised concerns about high core inflation and a deeply uncertain global environment. And last month, President Andres Manuel Lopez Obrador broke from his strict non-interventionist stance to tell Bloomberg he’d like to see a rate cut.

What Our Economist Says

“Monetary conditions are tight and anchoring the economy. A negative and widening output gap argues for accommodative monetary conditions, but high core inflation and volatility in financial markets are policy constraints. The central bank should be able to cut interest rates 25 basis points, in line with the Federal Reserve in July, to avoid relative tighter monetary conditions more than providing policy accommodation.”

--Felipe Hernandez, Latin America economist with Bloomberg Economics

Thursday’s decision will be published on the central bank’s website at 1 p.m. local time together with a statement from the bank’s board.

Here’s what to watch for:

Timing

The central bank hasn’t properly prepared the market for lower borrowing costs this time around, warns Manuel Sanchez, a former central bank board member known for his hawkish views. Banxico has a single inflation-fighting mandate with a target of 3%.

“If they argue that convergence to the target is going well, it’s probable that suspicions will arise that they cut rates to chase an economic growth objective,” Sanchez, whose term was up December 2016, said in an interview. The central bank could lose credibility that’s key to controlling inflation if it eases too soon, he said.

Inflation Vs Core Prices

Investors are leaning slightly toward easing as forecast by interest-rate swaps. Their argument goes: the 3.78% inflation rate is the lowest in 30 months, the economy narrowly dodged recession and the Federal Reserve, Brazil and Chile all just lowered borrowing costs.

Mexico On Verge of First Rate Cut in 5 Years: Decision Day Guide

Naysayers warn that 3.82% core inflation remains high, trade war risks with the U.S. abound and Argentina’s assets just fell off a cliff after a primary election stoked concern it’ll return to populist policies.

Weak Economy, Downgrades

Budget cuts by the Lopez Obrador administration, declining investment due to uncertainty about his policies and the risk of credit downgrades at state oil company Pemex have exacerbated a slowdown in Mexico’s economy. Latin America’s second-biggest economy may expand only 1% this year, the slowest since the 2009 recession, according to a Bloomberg survey.

JPMorgan Chase & Co. doesn’t see lower rates before September, and then only if certain conditions are met.

“We agree that an easing cycle is approaching, but the timing is tricky and requires clear signals,” JPMorgan economist Gabriel Lozano wrote in a research note. “The Fed cut and weak growth warrant a dovish stance” but “risks of downgrades, tariff threats, and fragile public finances call for prudence.”

To contact the reporter on this story: Nacha Cattan in Mexico City at ncattan@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Robert Jameson, Walter Brandimarte

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