Central Bank Chief Says Mexico Balances Rate Cuts With Stability
Central Bank Chief Says Mexico Balances Rate Cuts With Stability
(Bloomberg) -- Mexico’s policy makers are taking care not to jeopardize financial stability as they cut interest rates to soften the shock of the coronavirus pandemic, the nation’s top central banker said.
“We have to identify the rhythm and the monetary policy actions that may be the ones that best contribute to an orderly adjustment both in the economy and in the financial markets,” Banco de Mexico Governor Alejandro Diaz de Leon said in a phone interview Thursday.
He spoke just hours after the bank’s unanimous decision to cut its policy rate by half a percentage point to 5.5%, the lowest since 2016. Mexico has cut the rate by 1.5 percentage point in total since the pandemic hit, in the deepest series of cuts in more than a decade.
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The government of President Andres Manuel Lopez Obrador has opposed large-scale fiscal stimulus and bailouts for big companies, leaving the central bank to do the heavy lifting in battling the crisis. The economy will contract 6.6% this year, according to the International Monetary Fund, which would be the biggest slump among major economies in the Americas.
The central bank will update its own forecasts in its quarterly inflation report on May 27, he said.
When asked if the government’s response was adequate, Diaz de Leon said that he respects the administration’s right to set fiscal policy, just as the government has been respectful of the central bank’s autonomy.
Even after the three cuts, Mexico continues to have a relatively restrictive monetary policy, with the highest real, or inflation-adjusted, interest rate in the Group of 20.
Diaz de Leon said that that’s to be expected, given that Mexico went into the “unprecedented crisis” with borrowing costs that were high rates by global standards. Traders in interest rate swaps are betting that the bank will cut the rate by about another 1.25 percentage point over the next year.
After unscheduled rate cuts in March and April, Diaz de Leon said that he wouldn’t rule out more if needed.
Banxico has taken several other measures to boost liquidity, including dollar credit sales from a $60 billion swap line with the Federal Reserve, and boosting the amount of non-deliverable forward hedges sold in regular auctions.
The peso has lost almost 21% of its value versus the dollar since the start of the year. Diaz de Leon says that the currency’s flexibility has helped the economy absorb the shock. The peso rallied 1.3% on Thursday, strengthening after the decision.
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