Maradona-as-Central Banker Doubts Credit Suisse Rate CallEric Martin
Barclays Plc says traders and banks led by Credit Suisse Group AG that are predicting interest-rate cuts in Mexico have misread the central bank’s intentions.
One-year swap rates have fallen 0.27 percentage point to 4.57 percent since Jan. 17, the day before policy makers said in a statement that a rate cut “may be advisable” if inflation continues to slow. The swap rate is 0.27 percentage point less than the country’s 28-day interbank rate, indicating traders see the likelihood for a reduction in borrowing costs. Alonso Cervera, an economist at Credit Suisse, says the central bank will trim rates as much as one percentage point this year.
Banco de Mexico, the only Group of 20 central bank to leave borrowing costs unchanged and refrain from stepping up debt purchases since 2009, may be trying to cut bond yields without actually lowering rates, Barclays and Societe Generale SA said. The strategy, dubbed the “Maradona theory of interest rates” by Bank of England Governor Mervyn King in 2005, helped lower Mexican 2024 bond yields by 0.26 percentage point in the past two weeks as average emerging-market yields were little changed.
Cutting down the nation’s debt costs is “definitely one of the strategies that they’re playing,” Donato Guarino, a Latin America strategist at Barclays, said in a telephone interview from New York. “The market is becoming complacent with the idea that they’re going to cut rates. They haven’t moved since 2009, and according to our economists the probability of a cut is very low.”
Ricardo Medina Macias, a spokesman for the central bank, declined to comment on Banco de Mexico’s interest-rate strategy.
Policy makers left the reference rate unchanged at an all-time low of 4.5 percent for a record 32nd straight meeting on Jan. 18.
If a “downward trend in general and core inflation” is confirmed, “a reduction in the one-day interbank interest rate may be advisable,” the central bank said in the statement accompanying its decision. The cut would respond to “a situation of less economic growth and lower inflation,” the bank said.
Consumer prices rose 3.21 percent in the year through Jan. 15, the slowest pace in 15 months. Latin America’s second-largest economy grew 3.3 percent in the third quarter, down from 4.4 percent in the previous three months.
Gross domestic product probably expanded 3.8 percent last year, according to the median estimate from analysts surveyed by Bloomberg, after growing 3.9 percent in 2011.
The Bank of England’s King based the Maradona theory on a goal scored by Argentine soccer star Diego Maradona at the 1986 World Cup in Mexico. Maradona dodged five players in a 60-yard dash from his own half of the field to score to secure Argentina’s victory over England.
“The truly remarkable thing, however, is that Maradona ran virtually in a straight line,” King said in a 2005 lecture. “How can you beat five players by running in a straight line? The answer is that the English defenders reacted to what they expected Maradona to do. Because they expected Maradona to move either left or right, he was able to go straight on. Monetary policy works in a similar way. Market interest rates react to what the central bank is expected to do.”
Barclays’s Guarino recommends investors lock in the rate offered by the one-year swaps on a bet that the interbank rate will rise as the central bank disappoints investors by keeping borrowing costs unchanged.
“The rally at the front end of the yield curve is overdone at this point,” Eamon Aghdasi, an emerging-markets strategist at SocGen, said in a telephone interview from New York. “What the markets sometimes fail to do is distinguish signaling from a hint of upcoming policy changes. One of the things Banco de Mexico does quite well is to send signals to the market without adjusting the policy rate.”
Credit Suisse’s Cervera says the bank will cut rates to show that it has the ability to keep inflation in check even with looser monetary policy. In a Jan. 27 research note, he estimated a two-thirds probability Banco de Mexico will cut rates by 0.5 percentage point to 1 percentage point this year. Cervera previously forecast the bank would keep rates unchanged this year.
“A rate cut would not be aimed at promoting growth,” he said in e-mailed message. “It is about showing Mexico can keep inflation near 3 percent without having to pay an overnight rate of 4.5 percent.”
Itau Unibanco Holding SA also expects Mexico’s central bank to cut rates by 50 basis points, or 0.5 percentage point, this year to curb a rally in the peso, and Deutsche Bank AG said a cut of that size is “feasible” in 2013, according to a research notes published this week.
The extra yield investors demand to own Mexican dollar bonds instead of U.S. Treasuries fell two basis points to 163 basis points today, according to JPMorgan Chase & Co.’s EMBI Global index.
The cost to protect Mexican debt against non-payment for five years with credit-default swaps was unchanged at 98 basis points, according to data compiled by Bloomberg. Credit-default swaps pay the buyer face value if the issuer fails to comply with debt agreements.
The peso gained 0.8 percent today to 12.6062 per U.S. dollar. Yields on interbank rate futures contracts due in December, known as TIIE, were unchanged at 4.62 percent yesterday.
Central bank Governor Agustin Carstens is unlikely to cut rates because the U.S. economy, the biggest buyer of Mexican exports, has improved, according to Barclays. The London-based bank said this week that it boosted its Mexican growth forecast for 2013 to 3.5 percent from 3 percent.
Inflation will accelerate to 3.7 percent by year-end, according to the median estimate in a survey by Citigroup Inc.’s Banamex unit released Jan. 22.
“It’s not a deflationary environment, and the economic outlook, especially in the U.S., is looking a little bit better,” Barclays’s Guarino said. “You have a nice trade to be done if you don’t think they’re going to cut.”