June 6 (Bloomberg) -- Mexico’s stocks rallied with bonds as the peso declined after the central bank unexpectedly cut its benchmark overnight rate, citing weakness in Latin America’s second-biggest economy.
The benchmark IPC equity index climbed 1.4 percent to 42,778.26 today in Mexico City, its highest closing level since Dec. 30. Benchmark bonds due in 2024 rose 3.29 centavos to 134.76 centavos per peso, pushing yields down 34 basis points, or 0.34 percentage point, to 5.62 percent. The peso declined 0.5 percent to 12.9292 per U.S. dollar in the biggest drop among major Latin American currencies.
Mexico’s central bank unexpectedly reduced its target lending rate by 0.5 percentage point to a record low 3 percent after lowering its forecast for 2014 growth. All 20 analysts surveyed by Bloomberg forecast no change in rates.
“Lower relative rates mean less demand for the peso,” Alejandro Urbina, a money manager at Chicago-based Silva Capital Management LLC, which oversees $800 million, said in an e-mailed response to questions. “On stocks, if this is stimulative, it should be positive for growth.”
As domestic spending and investment remain weak, slack in the Mexican economy has increased, the central bank said in the statement accompanying today’s decision. The odds of inflation slowing to the 3 percent midpoint of the official target range in early 2015 have risen “significantly,” the bank said.
Policy makers said that while domestic spending and private investment remain weak, further rate cuts aren’t recommended in the foreseeable future.
Central bank Governor Agustin Carstens said May 21 that he still expected growth to pick up later in the year after a poor first quarter as the U.S. economy rebounds.
“There was no signal whatsoever that they were going to do this, so it’s taken a lot of people by surprise,” John Welch, a strategist at Canadian Imperial Bank of Commerce in Toronto, said by phone. “Everyone was betting the other way.”
President Enrique Pena Nieto said in Lisbon today that Mexico has carried out structural reforms that have made the country’s economy more open to foreign investment.
Mexico passed legislation last year to end Petroleos Mexicanos’s 75-year oil-production monopoly and allow private companies to drill for crude.
The central bank reduced its economic growth forecast for this year on May 21 to between 2.3 percent and 3.3 percent from a previous estimate of 3 percent to 4 percent after the U.S. economy, the biggest buyer of Mexican exports, stalled in the first quarter.
The Finance Ministry cut its 2014 growth forecast to 2.7 percent from 3.9 percent two days later after Mexico’s gross domestic product grew 1.8 percent in the first quarter from year earlier, compared with a 2.1 percent median forecast of analysts surveyed by Bloomberg.
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