Oct. 3 (Bloomberg) -- Twin hurricanes that struck Mexico last month are bolstering traders’ conviction that the central bank will lower borrowing costs for a third time this year to alleviate any damage to economic growth.
Interest-rate swaps yesterday indicated a 76 percent chance that Mexico’s central bank will cut its benchmark rate by 0.25 percentage point in the next three months to 3.5 percent. That’s the highest odds since the eve of policy makers’ half-point reduction in March. Sixteen of 20 analysts in a Sept. 20 survey by Citigroup Inc.’s Banamex unit predict at least one more cut this year, versus just three who anticipated the quarter-point reduction on Sept. 6.
Hurricanes Ingrid and Manuel left at least 157 people dead, with flooding that decimated crops such as tomatoes and chili peppers while disrupting deliveries and emptying hotels in Acapulco. While the destruction may push up inflation as food prices rise, it will pressure the central bank to cut borrowing costs to bolster an economy already growing at the slowest pace since 2009, according to Goldman Sachs Group Inc.
“The economy was already debilitated, and it was hammered by this shock,” Alberto Ramos, the chief Latin America economist at Goldman Sachs in New York, said in a telephone interview. “It makes sense for the central bank to ease more after this devastation.”
Before the hurricanes, Ramos expected the central bank to lower its 3.75 percent rate by 0.25 percentage point on Oct. 25 to a record-low 3.5 percent. The storms opened the door to a half-point cut this month or another reduction to 3.25 percent in December, he said. President Enrique Pena Nieto said the storms were the most intense on record.
Ricardo Medina Macias, a spokesman for Banco de Mexico, didn’t respond to e-mail and voice messages seeking comment.
Manuel and Ingrid drove more than 50,000 people from their homes and stranded 40,000 more in the resort city of Acapulco, including tourists from Mexico City who were celebrating over the country’s Independence Day holiday weekend.
While most Acapulco hotels were spared from damage, occupancy rates have declined due to the closing of the highway connecting the resort city to the nation’s capital, according to Armando Uribe Valle, president of the Mexican Association of Hotels and Motels.
Acapulco’s 18,000 hotel rooms registered with the association have been about 20 percent occupied in the weeks since the storms hit, Uribe said. The dropoff already has cost $19 million to $23 million in lost room charges, and demand could remain below normal for as long as two months, he said.
“I don’t remember it ever being this bad in terms of occupancy,” he said.
Three of the 14 highways nationwide that were closed by the storms remain blocked, Communications and Transportation Minister Gerardo Ruiz Esparza said at an event with Pena Nieto on Oct. 1. The government is aiming to have the infrastructure of Michoacan, a grower of produce including limes and one of the states hardest hit by Manuel, restored within four months, Ruiz Esparza said.
The central bank, led by Governor Agustin Carstens, cut the key rate to 3.75 percent on Sept. 6, surprising 19 of 20 economists in a Bloomberg survey.
The central bank was split in its decision, with two members voting to maintain rates and wait until the Federal Reserve clarified its plan for $85 billion monthly stimulus program that has fueled demand for emerging-market assets.
That was nine days before the storms hit, and the Fed on Sept. 18 said it would refrain from paring the stimulus.
The Fed announcement strengthened the peso and increased the chances for another rate cut, according to Credit Suisse Group AG’s chief Mexico economist, Alonso Cervera. In a Sept. 26 report he cut his forecast for this year’s growth in gross domestic product to 1.1 percent from 1.3 percent.
In the second quarter, the economy contracted by 0.7 percent from the prior three months, the first quarter-over-quarter drop since 2009. The third-quarter GDP report isn’t due until November.
The hurricanes “have increased downside risks to GDP,” wrote Cervera, who expects a quarter-point cut this month.
Although the destruction of crops may spur an increase in a measure of inflation that includes farm and energy prices, “we do not think that the potential spike in agricultural prices will have implications on monetary policy,” Cervera said.
The Mexican Association of Insurance Institutions estimated last week that the hurricanes caused 75 billion pesos ($5.7 billion) in damage, of which 12 billion pesos to 15 billion pesos will be covered by insurance.
The finance ministry said Sept. 27 that about 12.5 billion pesos from an emergency fund have been made immediately available for reconstruction and another 5 billion pesos from a repavement fund will be directed toward storm recovery. The government will also work with legislators to allocate more spending from next year’s budget to rebuilding, the ministry said.
CI Banco’s Jorge Gordillo says Mexico’s central bank will keep borrowing costs unchanged because of concern the Fed will start to unwind the stimulus at its meeting this month.
“Banxico doesn’t want to be going in the opposite direction of the Fed,” Gordillo, CI Banco’s director of economic analysis, said in a phone interview.
The extra yield investors demand to own Mexican government dollar bonds instead of Treasuries fell one basis point, or 0.01 percentage point, to 208 basis points at 4 p.m. in New York, according to JPMorgan Chase & Co.
The cost to protect Mexican debt against non-payment for five years with credit-default swaps rose one basis point to 121 basis points, according to data compiled by Bloomberg. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.
The peso fell 0.5 percent to 13.1735 per dollar.
Benito Berber, a strategist at Nomura Holdings Inc., projects a quarter-point interest rate cut in October and says there’s a 50 percent chance of another reduction in December.
“If you would have distributed or spread out the impact over 12 months, it of course would not push the central bank to cut,” Berber said in a telephone interview. “Given that it’s concentrated in a particular time when the economy was expected to recover after a very disappointing first half of the year, I think it will open the door for cuts.”
To contact the reporter on this story: Eric Martin in Mexico City at firstname.lastname@example.org