Mexico Keeps Key Rate at Record Low 3% After Forecasts Cut

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Agustin Carstens
Banco de Mexico's Governor Agustin Carstens. Photographer: Susana Gonzalez/Bloomberg

Mexico’s central bank kept borrowing costs unchanged at a record low for an eighth straight meeting after reducing its growth forecast for Latin America’s second-biggest economy.

Banco de Mexico’s board, led by Governor Agustin Carstens, left the overnight rate at 3 percent on Thursday, as forecast by all 29 economists surveyed by Bloomberg. After a surprise half-point reduction a year ago, policy makers have kept rates unchanged to boost a $1.26 trillion economy that has missed growth forecasts in eight of the past 12 quarters.

The central bank and government cut their 2015 growth projections last month after public spending reductions, a drop in oil output at state-owned Petroleos Mexicanos and a contraction in the U.S. In the absence of demand pressures, inflation has slowed to a nine-year low, with the peso’s drop to a record low against the dollar showing few signs of spurring consumer price increases.

“They’re still mindful of the potential external risks, but the economy is weak and inflation well behaved,” Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., said in a telephone interview from New York. “The pass-through from currency depreciation has been limited.”

Policy makers probably will keep borrowing costs unchanged until the fourth quarter, when they’ll raise them for the first time since 2008 after the Federal Reserve lifts rates, according to the median forecast of economists surveyed by Bloomberg.

The peso maintained its loss after the decision, weakening 0.2 percent to 15.5431 per dollar at 2:29 p.m. in Mexico City.

Rate Spread

The U.S. is preparing to tighten monetary policy even as stagnant growth elsewhere prompts central banks in Europe, China and Japan to ease policy.

Mexico’s central bank is concerned a smaller rate advantage versus the U.S. could prompt investors to pull money out of the Latin American nation. The difference between their target rates is 2.75 percentage points, the least since Mexico adopted a new benchmark in 2008.

“The first hike in Mexico is very much tied to the first hike by the Federal Reserve, in the sense that Banxico has to maintain its relative policy with respect to the Fed,” Carlos Capistran, the chief Mexico economist at Bank of America Corp., said in an e-mailed response to questions.

“However, given domestic conditions, in particular with inflation below the target, we maintain our view that Banxico is in no rush to hike, and that it will only do so gradually, after the Fed hikes,” Capistran said.

At their previous rate meeting in April, the majority of the central bank’s five-member board warned against raising rates before the Fed, saying such a move could have more costs than benefits given economic weakness and below-target inflation.

The annual inflation rate in the first half of May fell to 2.93 percent, the lowest since late 2005 and compared with the central bank’s 3 percent target. Weak growth, smaller gasoline cost increases and reduced rates for telephone services contributed to lower inflation earlier this year.

Slowdowns, Forecasts

Policy makers reiterated their forecast last month for inflation to remain near the target for the rest of this year and next. While Mexico has signaled it will probably raise its benchmark when the U.S. does, a contraction in the world’s largest economy at the start of the year has spurred speculation the Fed may put off its rate increase until 2016.

Mexico’s central bank on May 19 cut its growth forecast for this year to 2 percent to 3 percent, from the previous projection of 2.5 percent to 3.5 percent. The Finance Ministry also lowered its 2015 growth forecast last month.

While Mexico’s economy expanded 2.5 percent in the first quarter from a year earlier, compared with the 2.4 percent median forecast of analysts surveyed by Bloomberg, in March it experienced the biggest month-on-month decline in almost two years, signaling weakness heading into the second quarter.

“The fall in construction, the weakening of the oil sector together with the loss of dynamism in manufacturing led industrial production to contract slightly in the first quarter,” the central bank said in a statement accompanying the rate decision. “Slack conditions remain in the labor market and the economy as a whole.”

Peso Support

Mexico’s oil output during the first quarter slumped from a year earlier, heading for an 11th straight annual decline, and a deadly platform fire in April caused a further drop. Crude prices fell by almost half from a high in June 2014 through Wednesday.

The peso has plummeted 17 percent in the past year, reflecting expectations for monetary policy tightening in the U.S. and the impact of low crude prices on growth in Mexico, which depends on oil for a third of public revenue.

The currency tumble in March prompted officials from the Finance Ministry and central bank to announce $52 million in daily dollar sales, later extended through September, to help stabilize the peso.

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