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Mexico Central Bank Unanimous on Last Month’s Rate Reduction

Mexican policy makers were unanimous in their decision to cut the key interest rate last month in an attempt to lift the economy out of the slowest growth in more than three years.

Banco de Mexico reduced the overnight lending rate by 25 basis points to a record-low 3.5 percent on Oct. 25, a move forecast by 21 of 26 economists surveyed by Bloomberg, and said borrowing costs below this level wouldn’t be advisable. None of the five board members voted for keeping rates on hold, the minutes of the meeting published today showed.

Policy makers in today’s minutes said the country’s economy is showing signs of recovery in the third quarter and that future rate cuts aren’t advisable. New taxes, approved by Congress last week, will have a temporary impact on consumer prices, the majority of policy makers said.

President Enrique Pena Nieto last week received approval from Congress to step up spending next year and run a budget deficit equal to 1.5 percent of gross domestic product. The economy expanded 1 percent in the first half of the year, the least since contracting in 2009 amid the global financial crisis.

“Additional reductions to the benchmark interest rate aren’t recommended in the foreseeable future,” the central bank said in a statement accompanying its decision on Oct. 25. “Taking into account the expected fiscal policy, the board considers that the monetary stance is in line with” inflation slowing to the 3 percent target.

The peso fell 0.41 percent to 13.2781 per U.S. dollar at 9:12 a.m. in Mexico City. Traders see no chance of another interest-rate cut over the next six months, according to interest-rate swaps, which traded at 3.84 percent yesterday.

Third Cut

The Oct. 25 reduction was the third interest-rate cut this year after Banco de Mexico reduced the overnight lending rate by 25 basis points in September and by a half point in March. Prior to that, the bank hadn’t touched rates since slashing them 3.75 percentage points in 2009.

A report yesterday from the national statistics agency showed Mexican consumer prices rose in October by the most in seven months as electricity costs climbed, deepening expectations that central bankers will refrain from cutting interest rates again.

The central bank on Nov. 6 raised its forecast for inflation next year to 3.5 percent, a week after Governor Agustin Carstens said policy makers shouldn’t reduce interest rates again because tax increases will add to pressure on prices in the short term.

Junk Tax

Congress last week approved an 8 percent levy on junk food, a 1 peso-per-liter duty on sugary drinks, and raised the sales tax at the northern border to 16 percent from 11 percent.

“Taking into consideration the impact of the fiscal reform, a rate below 3.5 percent at this time, is not necessary, adequate for the convergence” of inflation to the central bank’s 3 percent target, Carstens said in an Oct. 30 interview.

While the central bank on Nov. 6 cut its growth forecast for this year to between 0.9 percent and 1.4 percent from 2 percent to 3 percent, it raised the inflation estimate for next year to 3.5 percent from near 3 percent, citing the tax increases.

Retail sales and industrial production unexpectedly fell in August from a year earlier, adding to signs that economic weakness from the first half of the year continued in the third quarter.

“The risks to the downside for growth in the Mexican economy, while they are less than in the most recent months, remain elevated,” the central bank said in the Nov. 6 quarterly inflation report.

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

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

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