Mexico Central Bank Split in Cutting Rate as Economy Stalled

Mexican policy makers were split in their decision to cut the interest rate this month to a record low in a bid to boost the slowest economic growth in more than three years.

The central bank’s board unexpectedly reduced its key rate by 25 basis points, or 0.25 percentage point, to a record-low 3.75 percent Sept. 6, saying the economy experienced a significant and unexpected slowdown in the second quarter. Two of five board members voted for keeping rates on hold, the minutes of the meeting published today showed.

The two dissenters said they would rather wait until the Federal Reserve clarified its strategy before changing the monetary stance. Since then, the Fed decided against tapering U.S. stimulus, which strengthened the peso and will increase support in Mexico’s central bank for an additional rate cut, according to Alonso Cervera, chief Mexico economist at Credit Suisse Group AG. (CSGN)

“Given the Fed’s no-taper decision earlier this week, the appreciation of the peso since the rate cut and the destruction caused by hurricanes Ingrid and Manuel, I think that the central scenario has to be that we will see another rate cut” Cervera wrote in an e-mailed response to questions.

Slower Inflation

Annual inflation slowed in each of the past four months, easing into the central bank’s 2 percent to 4 percent target range in July. Inflation was 3.46 percent in August.

“In coming months, it’s expected that inflation’s path will be lower than previously anticipated due to estimates that the large degree of slack in the economy will continue in the second half of this year and next year,” the bank board’s majority said in the minutes to their decision.

Yields on three-month interest-rate swaps increased two basis points to 3.97 percent today, reducing the likelihood to 44 percent that Mexico’s central bank will lower benchmark borrowing costs by 0.25 percentage point in the next three months. Traders had assigned a 52 percent chance of further cuts yesterday.

Yields on fixed-rate government peso bonds due in 2024 rose two basis points to 5.83 percent, reversing an earlier decline.

Banxico’s rate cut this month came after the bank reduced borrowing costs in March for the first time since 2009. The March vote was the board’s first split decision since it began publishing minutes in February 2011.

Split

The split decision reduces chances the central bank will cut rates by more than another 25 basis points this year, according to Delia Paredes, an economist at Grupo Financiero Banorte SAB.

“The fact that there was a divided decision reduces the probability that we’ll see more aggressive actions by the central bank,” Paredes said in an e-mailed response to questions.

The Fed unexpectedly announced this week that it will continue its $85 billion of monthly bond purchases, leading the peso to strengthen 1.2 percent to 12.7751 per dollar at 11:54 a.m. local time since Sept. 17. Economists had forecast it would dial down monthly Treasury purchases by $5 billion, according to a Bloomberg News survey.

Banks predicting policy makers will cut interest rates by a quarter point at their next meeting on Oct. 25 include Credit Suisse and Banco Bilbao Vizcaya Argentaria SA (BBVA), which correctly forecast this month’s reduction.

Rafael de la Fuente, an economist at UBS AG in Stamford, Connecticut, said he expects the central bank to cut rates 25 basis points in October. One of the two dissenting board members could vote for a cut based on the Fed’s decision this week and the subsequent peso strengthening, he said.

“When you see the arguments made by one the hawks, they’re arguments that in recent days have gone away,” De la Fuente said in a telephone interview.

To contact the reporters on this story: Nacha Cattan in Mexico City at ncattan@bloomberg.net; Eric Martin in New York at emartin21@bloomberg.net

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net

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