Mexico May Have Multiple Rate Cuts, Central Banker Says

(Bloomberg) -- Central bank deputy governor Gerardo Esquivel said there may be more than one interest rate cut in the pipeline for Mexico this year as policy makers have room to keep easing monetary policy.

One of the five board members who decide on rates, Esquivel said in a video interview that a recent uptick in inflation was not surprising and won’t likely persist. He wouldn’t rule out the possibility of having real rates -- once inflation is subtracted -- falling into negative territory if conditions warrant and if necessary.

“Depending a bit on how prices keep evolving going forward, we may or may not take this space that some of us consider to exist in interest rates,” he said. “We will see if there’s room to do so in subsequent decisions that we will take in August, and in September, and more toward the end of the year.”

Mexico’s central bank has slashed borrowing costs by 3 percentage points to 5% over the past 12 months, accelerating its easing cycle once the coronavirus pandemic hit the country in March. Real rates are still one of the highest among G-20 nations and economists on average only see one more cut this year, in August, even as the economy is set to contract 9.6%.

Esquivel added that he didn’t know what would happen after August and that it would depend on how several indicators perform.

He joined the central bank board early last year, after being tapped by President Andres Manuel Lopez Obrador. While initially voicing his dissent with the rest of the usually hawkish board, Esquivel has lately been agreeing with the pace and magnitude of the bank’s easing cycle.

“I’ve voted in all of the most recent decisions along with the rest of the board members, not necessarily because I’m in agreement with the level of the rate; I’ve always said it was very high,” Esquivel said. “But given where we started, it seems the rhythm at which we’ve cut is appropriate due to the situation of the country and what the inflation rate permits.”

Gradual reductions have helped reestablish order in Mexico’s financial markets, he added.

Temporary Jump

Inflation sped up in early July more than economists expected to 3.59%, from 2.15% in April, propelled by rising food and gasoline prices. The central bank targets inflation at 3%, plus or minus 1 percentage point.

Esquivel pointed out that many reasons may be behind higher food costs, including people paying more to shop closer to home and companies taking advantage of the virus-driven lockdown. “We can think of many factors that could explain this behavior, none of which seems to me would cause persistence in inflation going forward,” he said.

Esquivel said he wouldn’t seek negative real rates and it shouldn’t be an objective, but if inflation dips below or close to target, “I’d have no issue personally in doing so if the circumstances supported it.”

Mexico’s economy posted a record 17.3% contraction in the second quarter compared with the previous three months, according to preliminary data released Thursday. A haphazard national response to the pandemic hurt jobs and output while failing to slow the outbreak, posing a challenge to Lopez Obrador.

It will take until the end of 2022 for output to return to pre-pandemic levels, Esquivel said, voicing a similar forecast to that of the Finance Ministry. Some experts are more pessimistic: Jessica Roldan, an economist at Mexican brokerage Finamex, said it will take seven years for GDP to recoup levels seen before the crisis.

Esquivel explained that the central bank’s decision to adjust liquidity facilities for small businesses on Thursday arose from concerns they were too inflexible. One adjustment includes allowing for financing instruments to be extended as long as 36 months. With these changes, it’s now up to the banks to do their part and lend, he said.

©2020 Bloomberg L.P.