Mexico Central Bank Cuts Rate Amid Forecasts Easing Will End

(Bloomberg) -- Mexico cut its benchmark interest rate to the lowest in almost four years to counter its worst economic crisis since the 1930s.

Banco de Mexico, or Banxico, lowered its policy rate by half a percentage point to 5% in a unanimous decision, as forecast by all 21 economists in a Bloomberg survey. The decision is the fourth such cut since the coronavirus pandemic hit the country.

Mexico’s economy will shrink 10.5% this year, more than peers such as Brazil, Russia, South Africa and India, according to the International Monetary Fund. Despite that, swaps traders are betting that Banxico won’t lower the rate below 4.25%, as the inflation outlook worsens.

“The decision was in line with our expectations,” said Alonso Cervera, chief Latin America economist at Credit Suisse. “By reiterating the guidance and not innovating much in the wording of the statement, the bank is sending the signal that another 50 basis-point cut in August should be the central scenario.”

The central bank stated in a communique accompanying its decision that the outlook for inflation “remains uncertain.”

Thursday’s reduction may be one of the last in the current cycle for the famously cautious central bank amid an uptick in price increases.

Policy Outlook

“Banxico will raise the bar for future cuts,” due to its fear of inflation, Barclays economist Marco Oviedo said before the decision.

Oviedo said that Thursday’s cut will likely be the last this year, while economists in a Citibanamex survey predict half a percentage point in cuts this year.

Annual inflation accelerated more than expected, to 3.2%, in the first half of June, above the central bank’s 3% target. Inflation expectations have also jumped in recent weeks, limiting Banxico’s space for further cuts.

The central bank stated Thursday that the outlook for growth is still trending downward, and that despite seeing some recovery from a reopening in a few regions and sectors in May and June, the impact has already been considerable. “Uncertainty persists,” the bank said.

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Mexico’s economy has been among those hardest hit by the coronavirus pandemic, due to the fall in trade with the U.S. and the crash in oil prices. More than 12 million Mexicans lost or were suspended from their jobs in April and retail sales slumped 24% compared to a year earlier.

Even after another cut, Mexico would still have one of the world’s highest interest rates adjusted for the rate of inflation.

The central bank’s caution is shared by President Andres Manuel Lopez Obrador. He has continually warned about the dangers of taking on too much debt and has resisted calls for big stimulus packages, or for bailouts for the nation’s largest companies.

©2020 Bloomberg L.P.