Mexico Central Bank Deputy Governor Sees No Rate Cut Case

Mexican central bank board member Manuel Sanchez said he doesn’t see a case for the first interest-rate cut since July 2009. The peso rallied the most in three weeks and the benchmark stock index pared its gain.

“At this moment in time I don’t see a case for a rate cut,” Sanchez said today in an interview at Bloomberg’s Mexico City office. “I would like to see a better behavior of inflation. The rigidity that inflation expectations have maintained for many, many years away from the target, above the target obviously -- this stubbornness worries me.”

Sanchez, who joined the five-member bank board that votes on Mexico’s rate decisions in May 2009, said the Mexican economy is growing at its full potential, and that if this continues sooner or later demand pressures could appear. Monetary policy should “remain vigilant” to risks including agricultural shocks such as bird flu and financial weakness abroad that could crimp investment in Mexican assets and hurt the peso, he said.

The peso rallied 0.6 percent, the most in three weeks, to 12.7652 per dollar. The benchmark IPC stock index pared its gain for about two hours before rallying to close the day with a 0.7 percent advance.

‘Convergence Process’

Banxico’s board signaled a willingness to trim borrowing costs in a statement accompanying its latest rate decision on Jan. 18, after annual inflation slowed to within its target range of 2 percent to 4 percent for the first time since May. That was a shift from the November policy statement, when the bank said it could raise rates if fast inflation persisted.

In the presentation of Banxico’s quarterly inflation report on Feb. 13, central bank Governor Agustin Carstens, who leads the board, said the bank may cut rates “if we keep advancing in this convergence process, and it’s shown that we have inflation each time closer to 3 percent in a more sustainable way.”

“We would like, with time, to see a greater convergence in inflation toward 3 percent,” he said.

Inflation tumbled to a 15-month low of 3.25 percent last month, down from 4.77 percent in September yet still above the central bank’s 3 percent target. Consumer price increases neared that target in 2011 and last touched it on a monthly basis in 2006. The inflation rate accelerated to 3.47 percent in the first half of February.

‘Few Months’

Sanchez today disputed the Banxico majority view that inflation is converging toward the target, echoing remarks prepared for a Feb. 20 speech in Mexico City that said “convergence of inflation to the permanent target demands more than a few months of good results.”

Sanchez today wouldn’t predict how he’ll vote in the next rate decision scheduled for March 8. Interbank futures contracts have been showing traders are betting Banco de Mexico will cut the interest rate from a record-low 4.5 percent. Nineteen of 20 economists in a survey by Citigroup Inc.’s Banamex unit published Feb. 20 expect the board to lower rates this year. Inflation will end the year at 3.67 percent, according to the median economist estimate in the survey.

Analysts project a 50 basis-point interest-rate cut by April, according to the median estimate in the survey. In the previous poll they forecast a change in rates in January 2014.

Not March

“There’s room for a cut, but not in March, not yet,” said Gabriel Lozano, chief Mexico economist at JPMorgan Chase & Co., who forecasts the central bank to cut rates by 50 basis points in June. “They need to confirm that inflation is going down before acting.”

While Banxico hasn’t had a split decision among its members since it began publishing minutes from monetary policy decisions in February 2011, reaching a consensus isn’t a “prerequisite” for a rate decision, Sanchez said.

Lozano said that after Sanchez’s comments he thinks it’s more likely that “we might see something in terms of non-unanimous voting” at the central bank, although not in March.

The departure of Jose Julian Sidaoui from the central bank board when his term ended last year left Sanchez as the member with the biggest reputation for being a “hawk,” or the member most focused on price stability, Gabriel Casillas, the chief economist and head of research at Grupo Financiero Banorte SAB, said in a Feb. 25 interview.

Banorte maintained its forecast for a rate cut in March even after Sanchez’s comments today, economist Delia Paredes said in an e-mail.

‘Transitory Shocks’

The decline in the inflation rate was helped by “transitory positive shocks,” Sanchez said today. The cost of mobile telephone services tumbled 39 percent in November and December, helping bring down inflation, before jumping 21 percent in January. Increases in egg and poultry prices that lifted inflation in the middle of last year have also eased.

Today’s remarks “paint Sanchez as one of the more hawkish members of the Banxico committee,” said Enrique Alvarez, the head of Latin America fixed-income research at IdeaGlobal in New York. “What Sanchez is saying now is that there is a position within the Banxico committee that perhaps is not as willing or as convinced that it’s the right time to lean heavily in the direction of a rate cut, which is surprising if you evaluate the latest figures to come out of Mexico.”

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