Mexico Sees Lax Global Monetary Policies Helping Determine RateEric Martin and Nacha Cattan
Mexico central bank Governor Agustin Carstens, who oversaw the first benchmark rate cut since 2009, said lax monetary policies in developed nations and slowing inflation will help determine future interest rate decisions.
Wealthier countries may find ways to further ease monetary policy, Carstens said yesterday, after central banks in Australia, the euro zone and Poland cut their key interest rates to record lows in the past week. Mexico has attracted capital inflows, spurring a peso rally, even after cutting the benchmark rate to an all-time low of 4 percent in March. Inflation will probably slow toward the bank’s target range of 2 percent to 4 percent in June after accelerating in April and May, he said.
The bank’s outlook for inflation and a backdrop of global monetary easing make it likely policy makers will cut rates by another 50 basis points, or 0.5 percentage point, as soon as July, said Alonso Cervera, an economist at Credit Suisse Group AG in Mexico City.
“It was reassuring to see central bank Governor Carstens express confidence that the inflation shock will prove temporary and that the central bank now expects even lower core inflation for the next several quarters,” Cervera said in an e-mail.
Banxico said in yesterday’s quarterly inflation report that core inflation, which excludes more volatile items like energy and agricultural prices, may slow below 3 percent later this year and next. The measure dropped to 2.88 percent in January, the lowest in more than 30 years, before climbing to 3.02 percent in March. Carstens, in testimony at the Mexican Senate on April 10, highlighted policy makers’ success in containing core inflation, which fell within its target range three months after he took office in January 2010.
Banxico sees the overall inflation rate, which climbed to 4.72 percent in the first half of April, dropping to below 4 percent in the second half of this year and “very close” to 3 percent in 2014, according to yesterday’s report. The bank maintained its forecast for the economy to grow 3 percent to 4 percent this year and 3.2 percent to 4.2 percent in 2014.
Carstens told Radio Formula on April 29 that policy makers may consider reducing borrowing costs if the annual inflation rate falls below 4 percent. Three days later he said he hadn’t intended to signal a future rate decision.
Monetary policy abroad “is a factor, among many, that this board will consider,” Carstens said yesterday. “It’s a very important phenomenon, but we can’t in any way say that it’s the only factor that intervenes in our decisions. The fundamental factor, the backbone of the process of reflection that the board goes through, is how different factors influence the inflation trajectory and in particular its convergence on the 3 percent objective in the medium term.”
The March vote to lower the benchmark rate was the five-member board’s first split decision since it began publishing minutes from monetary policy meetings in February 2011. One board member dissented, saying lower interest rates could threaten the inflation target.
“While the general tone of the report is still dovish, it’s clear at the end that Banxico’s stance on monetary policy is neutral,” Carlos Capistran, an economist at Bank of America Corp., said in a phone interview yesterday from Mexico City.
The peso gained 0.4 percent yesterday to 11.9771 per U.S. dollar, the strongest level since August 2011, after Fitch Ratings raised Mexico’s credit rating to BBB+ on the prospect that proposed legal changes will boost growth in Latin America’s second-largest economy. The currency remains “very” undervalued compared with its level in 2008, before the financial crisis, and its rally isn’t hurting Mexican exports, Carstens said.
Still, Mexico’s economy has shown signs of weakness and faces risks from the U.S. and Europe, Carstens said. Retail sales surprised analysts in February by contracting for the second time in three months. Mexico’s gross domestic product will expand 3.5 percent this year, down from 3.9 percent in 2012, according to the median estimate of economists surveyed by Bloomberg. U.S. GDP growth this year will ease to 2 percent from 2.2 percent last year, according to a separate Bloomberg survey.
Australia’s central bank cut its benchmark rate to a record 2.75 percent May 7, less than one week after the European Central Bank cut its interest rate a quarter-point to 0.5 percent. South Korea cut its seven-day repurchase rate to 2.5 percent from 2.75 percent today.
After cutting its benchmark interest rate in March for the first time since 2009, Banxico kept the overnight rate unchanged at 4 percent on April 26. Policy makers’ statement accompanying last month’s decision made no direct mention of a possible rate move.
“Governor Carstens increased the dovishness of the tone by stating two things, on one hand the downside risks for global and domestic growth have increased; and second by emphasizing the transitory nature of recent inflationary pressures,” Gabriel Casillas, chief economist at Grupo Financiero Banorte SAB, said in an interview yesterday.