Mexico’s rate cut hints further monetary policy easing on way

Mexico’s central bank (CB) has hinted that further monetary policy easing could be on the way. The bank cut its key lending rate on Thursday for the first time since June 2014, citing slowing inflation and increasing slack in the economy.

In a majority decision, the Bank of Mexico’s (Banxico) five-member board voted to lower the overnight interbank rate by 25 basis points to 8.00%. One board member voted to maintain the rate at 8.25%, the bank said in a statement.

The surprise move by Mexican policymakers follows rate cuts by central banks around the world in the last week as a trade-induced slowdown shows more signs of stymieing global growth. Last week New Zealand’s central bank cut rates to a record low, a reduction that was followed by central banks in Thailand and the Philippines.

The peso weakened as much as 0.4% to 19.76 per dollar after Banxico’s decision, but quickly reversed those losses. Yields on Mexico’s 10-year bonds fell by 19 basis points to 7.06%, Refinitiv data showed.

Eleven of 16 analysts and economists surveyed for a Reuters poll published on Monday had expected Banxico to hold the rate at 8.25%, the level it had maintained since Dec. 20. Five of those surveyed expected a rate cut of 25 basis points.

“Slack conditions in the economy have continued to loosen, even more than expected, widening the negative output gap. In an environment of significant uncertainty, the balance of risks for growth remains tilted to the downside,” the bank said.

In general terms inflation has gone down “a little faster” than expected, Central bank Governor Alejandro Diaz de Leon said on Mexican radio.

“We’ve seen economic activity stagnating for several quarters now and that in some way has given the bank space to consider that it will contribute to inflation its trajectory of converging toward the 3% target,” said Diaz de Leon.

As the week progressed, however, more analysts began to say that the central bank could lower borrowing costs with the economy sputtering and inflation slowing.

Charles Seville, co-head of Latin America sovereigns at ratings agency Fitch, said the rate cut reflected lower inflation risks and greater domestic and global growth risks since the bank’s last meeting.

“We still think Banxico will stay vigilant given domestic policy risks and the potential for risk aversion to affect the exchange rate, but depending on the trajectory of Fed rates, the door may be open to further rate cuts,” he said.

At the end of last month, the US Federal Reserve cut its main lending rate for the first time since 2008.

The Banxico rate cut could help boost the Mexican economy after paltry growth of 0.1% in the second quarter.

The bank’s decision was the first since Mexican President Andres Manuel Lopez Obrador, who says he respects the central bank’s autonomy, told Bloomberg news agency last month it was important to lower interest rates to boost growth.

Banxico has a mandate of containing inflation.

Helping to justify the cut was a third consecutive monthly slowdown in annual inflation in July, when the rate eased to 3.78%. The bank targets a rate of 3%, with a one per centage point tolerance threshold above or below that figure.

Edward Glossop, Latin America economist at Capital Economics, said that despite Banxico’s relatively cautious post-meeting statement, “probably designed to temper expectations of an aggressive easing cycle ... more rate cuts are on the way.”

“With inflation set to fall further and growth to stay weak, we expect another 50 basis points of rate cuts to 7.50% by year-end,” Glossop said in a note to clients.  Meanwhile, Argentina’s peso jumped after a bruising sell-off in the past three sessions and most other Latin American currencies stabilized amid receding worries about a recession in the world’s largest economy.

The Brazilian real jumped as much as 1% before easing slightly to trade at 4.0286 per dollar after the central bank announced its decision to sell dollars in the spot currency market for the first time in over a decade. The Brazilian central bank said on Wednesday it would sell up to $550 million daily in the spot market along with reverse swaps of the same value, in response to rising demand for liquidity.

The Mexican peso edged higher ahead of the central bank’s decision on interest rates. Analysts expect policymakers to hold rates at 8.25%, according to a Reuters poll, although they are expected to adopt a dovish tone pointing to impending rate cuts.

“While our economists call for the easing cycle to begin in September, they note a high risk for an August start,” Citi analysts wrote in a note. “If they cut at this meeting, we would imagine it comes with language that tries to dissuade the market from positioning for a very deep cutting cycle, partly because Banxico wants to observe how MXN reacts to the easing.”

Reuters