Mexico’s short-term bonds rallied after policy makers surprised analysts by cutting interest rates for the first time in three years while signaling no further reductions are on the horizon.
Yields on bonds due in December fell five basis points, or 0.05 percentage point, to 4.11 percent, at 4 p.m. in Mexico City, according to data compiled by Bloomberg. The peso strengthened 1 percent to 12.6279 per dollar, the most among 25 emerging-market currencies, fueling the biggest weekly increase since January.
Banco de Mexico reduced the overnight lending rate by a half-percentage point to a record low 4 percent, a move forecast by seven of 25 analysts surveyed by Bloomberg. The reduction “doesn’t represent the start of a cycle” and shouldn’t prevent inflation from slowing to policy makers’ target of 3 percent, the central bank said in a statement accompanying its decision.
“There’s an adjustment to 4 percent,” Pedro Tuesta, the chief economist at 4Cast Inc., said in a telephone interview from Washington. “Banxico is telling the market, ‘I’m not going to change for a relatively long time.’”
The currency rallied on speculation the interest-rate cut will support growth in Latin America’s largest economy after Brazil, according to Bernd Berg, a currency strategist at Credit Suisse Group AG in Zurich.
“It is a one-off rate cut which is intended to boost economic growth as inflation recently receded,” Berg said in an e-mailed response to questions. “Mexico’s peso is strengthening because the rate cut that will boost Mexican growth further.”
The national statistics agency reported yesterday that consumer prices rose 3.55 percent in February from a year earlier, less than the 3.60 percent median forecast of economists surveyed by Bloomberg. Annual inflation was 3.25 percent in January.
The currency was supported as a U.S. report showed the unemployment rate unexpectedly fell to 7.7 percent, the lowest level since December 2008. Mexico sends about 80 percent of its exports to its northern neighbor.
Longer-term Mexican bonds fell as some investors who were expecting a larger interest-rate cut or more reductions in the near future sold the debt, Alejandro Urbina, who helps oversee $800 million in emerging-market assets at Silva Capital Management, said in a phone interview from Chicago. Yields on peso-denominated debt due in December 2024 rose five basis points to 5.01 percent.