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Mexico Sees No More Rate Cuts as Economy Expected to Recover

Mexico’s central bank sees no need for additional reductions in borrowing costs following a surprise cut earlier this month as analysts forecast a recovery in the economy.

Policy makers voted 3-2 to reduce the key interest rate a half point to a record low 3 percent on June 6, the central bank said in the minutes published today. Following a 1.8 percent expansion in the first three months of 2014, growth will accelerate to 4 percent in the fourth quarter, according to analysts surveyed by Bloomberg.

The three central bank board members who voted in favor of reducing rates said further cuts wouldn’t be advisable in the foreseeable future, the minutes said. Banco de Mexico Governor Agustin Carstens, who has reached the 3 percent inflation target in only one month since taking office in January 2010, is adding stimulus to an economy where growth has missed analyst forecasts in seven of the past eight quarters.

“The arguments against further cuts are very strong in the minutes,” Marco Oviedo, chief Mexico economist at Barclays Plc, said in an e-mailed response to questions. “If the economy is recovering, there is no further need” to cut rates.

The peso strengthened 0.1 percent to 13.0095 per U.S. dollar at 10:51 a.m. in Mexico City. The yield on Mexico’s fixed-rate government peso bonds due in 2024 fell one basis point to 5.74 percent.

Lower Growth

The Banco de Mexico’s rate cut on June 6 surprised all 20 economists surveyed by Bloomberg, who had forecast no change. Slack in the economy has increased and inflation (MXCPYOY) isn’t under pressure from aggregate demand, the majority of central bank board members said in the minutes.

“The majority of the members stressed that the unexpectedly low dynamism of the first quarter this year leads to forecasts that for 2014 economic growth will be less than what was expected just two weeks ago,” policy makers said in the minutes.

Inflation slowed from an eight-month high of 4.48 percent in January to 3.51 percent in May as the effect of new taxes waned. Mexico on Jan. 1 raised the sales tax along the U.S. border and in some coastal areas to 16 percent from 11 percent and implemented a new 1-peso-per liter duty on soft drinks. Policy makers target inflation of 3 percent, plus or minus one percentage point.

The first-quarter expansion of gross domestic product was less than the 2.1 percent year-on-year median forecast of analysts surveyed by Bloomberg. Compared with the previous quarter, the economy grew 0.3 percent, the statistics agency said May 23.

To contact the reporters on this story: Eric Martin in Mexico City at emartin21@bloomberg.net; Brendan Case in Mexico City at bcase4@bloomberg.net

To contact the editors responsible for this story: Andre Soliani at asoliani@bloomberg.net Philip Sanders, Harry Maurer

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