Mexico Central Bank Paused Rate Cuts to Assess Inflation

(Bloomberg) -- Mexico’s central bank wants to better evaluate the recent increase in the country’s inflation rate before considering a further reduction to its benchmark interest rate, Governor Alejandro Diaz de Leon said.

Banxico, as the central bank is known, surprised markets on Thursday by pausing a record monetary easing cycle that has lent one of the few supports to an economy expected to contract nearly 10% this year. The board voted 4-1 to hold borrowing costs at 4.25%, after inflation held above the bank’s target ceiling for three straight months.

“We are making a pause to identify the inflationary process, have better perspectives and take the best decision possible,” Diaz de Leon told Bloomberg News in an interview. “We don’t give dates or horizons and we will be reviewing decision by decision how inflation has evolved with respect to the forecast.”

The Mexican peso pared losses after the central bank decision on Thursday and led gains among emerging-market currencies early on Friday, strengthening 0.3%.

President Andres Manuel Lopez Obrador has rejected a large fiscal stimulus of the kind implemented by most of Mexico’s peers, arguing that lower debt will hasten the recovery.​ That’s left the central bank to do the heavy lifting in the crisis, slashing rates from 8.25% over 11 straight meetings beginning in August 2019.

MEXICO REACT: Banxico on Pause Until Evidence of Lower Inflation

It was the longest easing streak since Mexico formally adopted an operating interest rate target in 2008. But annual inflation has almost doubled since April, hitting 4.09% in October, the third straight month above the ceiling of the bank’s target range, which is 3% plus or minus one percentage point.

The rise in prices has been driven by surging food costs across emerging markets and private sector inflation expectations for next year are at 3.6%, leading most analysts to think the bank had slightly more leeway to cut the key rate. Only six of 22 economists surveyed by Bloomberg predicted the hold. Sixteen forecast a quarter-point reduction.

“Even if our scenario continues to be that some of these increases will be transitory, we need to identify and confirm this convergence path toward the target,” Diaz de Leon said in the interview. By making a pause in the easing cycle, Banxico seeks to “have more clarity and information regarding the shape of this convergence,” the governor said.

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