Banxico Wary of U.S. Policy as Economists Dismiss Rate CutNacha Cattan and Eric Martin
Mexico’s central bank said it is watching U.S. monetary policy closely after a slump in the peso convinced economists that policy makers won’t cut rates even as economic growth slows.
The central bank’s board members were unanimous in their decision to leave the benchmark rate at a record-low 4 percent on June 7 after cutting borrowing costs in March for the first time since 2009, according to the minutes of the meeting published today. Inflation will slow slightly in June and more quickly starting in July after picking up “significantly” in recent months, policy makers said.
Economists have erased their calls for a rate cut this year after the U.S. Federal Reserve said it may phase out its asset buying program, damping fund flows to emerging markets and weakening the peso. At the same time, analysts have reduced forecasts for growth in Latin America’s second-largest economy to below 3 percent and policy makers said downside risks to growth have “intensified.”
“We think the message is: we’d like to cut rates due to the slowing economy, which is without inflation pressures,” Gabriel Casillas, chief economist and head of research at Grupo Financiero Banorte SAB, said in an e-mail. “But the behavior of relative monetary conditions, meaning the peso, won’t allow us to do it.”
Banorte changed its call on rates yesterday, forecasting they will remain on hold for the foreseeable future after previously predicting for a cut in July. A weaker peso pushes up import costs, and a rate cut risks pushing the currency down even further against the dollar.
The peso fell 0.4 percent to 13.4232 per dollar at 10:30 a.m. in Mexico City and has fallen 8.1 percent in the past month, the second-worst performer among major currencies tracked by Bloomberg. The peso fell to an almost 11-month low yesterday after Fed Chairman Ben S. Bernanke said the U.S. central bank may phase out one of the most aggressive easing strategies in its history.
Yields on six-month Mexican interest-rate swaps climbed five basis points yesterday to 4.40 percent, indicating traders see no chance the bank will lower rates by December. As recently as May 21, the likelihood was about 68 percent.
The inflation rate was 4.63 percent in May, above the central bank’s target range of 2 percent to 4 percent for the third consecutive month, and little changed from 4.65 percent in April.
“All members of the board highlighted that there are downside risks for economic activity in Mexico,” the central bank said in today’s minutes. Policy makers “will be attentive to the implications on the inflation outlook of economic activity and Mexico’s relative monetary policy with respect to the rest of advanced nations, particularly the United States.”
Economists now say Banxico’s next rate move will be a quarter-point increase in June 2014, according to the median estimate in a survey yesterday by Citigroup Inc.’s Banamex unit. In the previous biweekly poll, they estimated a half-point cut in September of this year.
The survey also showed economists slashed their 2013 growth expectations to 2.7 percent from 3 percent, less than the government’s 3.1 percent forecast. The government cut its own forecast last month from 3.5 percent after expansion slowed more than expected to 0.8 percent in the first quarter as industrial output contracted.
Economic growth will quicken as the government increases spending in the second half of the year, Finance Minister Luis Videgaray said in a June 17 interview. Expansion was at the slowest pace in more than three years in the first quarter after spending was contained when a new government took over in December, Videgaray said. President Enrique Pena Nieto took office on Dec. 1.