Mexico Policy Makers Agreed to Signal End of Rate Reductions

Mexican policy makers were unanimous in their decision to cut the key interest rate to a record low last month while agreeing to send a signal their reduction would be the last for the foreseeable future.

Banco de Mexico reduced the overnight lending rate by a quarter point to a record-low 3.5 percent on Oct. 25, a move forecast by 21 of 26 economists surveyed by Bloomberg. Policy makers said borrowing costs below this level wouldn’t be advisable, minutes of the meeting published today showed.

Central bankers in today’s minutes said the economy showed signs of recovery in the third quarter as most agreed downside risks to growth, while still elevated, have eased. Policy makers said they expect a rebound in public spending, spurred by the fiscal stimulus approved by Congress last week, to help spur an economic recovery.

“They’ll keep rates unchanged for a long period of time,” Gabriel Lozano, chief Mexico economist at JPMorgan Chase & Co., said in a telephone interview. “The central bank sees fiscal policy as stimulating the economy.”

President Enrique Pena Nieto last week received approval from Congress to step up spending next year and run a budget deficit equal to 1.5 percent of gross domestic product. The economy expanded 1 percent in the first half of the year, the least since contracting in 2009 amid the global financial crisis.

‘Foreseeable Future’

“The board members agree that after lowering the reference rate on this occasion, it wouldn’t be advisable to carry out additional interest-rate reductions in the foreseeable future, and this posture should be communicated to the market,” the central bank said in the minutes.

The peso fell 0.5 percent to 13.2844 per U.S. dollar at 9:53 a.m. in Mexico City. Traders see no chance of another interest-rate cut over the next six months, according to interest-rate swaps, which traded at 3.86 percent today.

“Banxico closed the door to cuts because growth is around the corner, helped by a huge doses of fiscal spending,” Benito Berber, a strategist at Nomura Holdings Inc., wrote today in an e-mail response to questions.

The Oct. 25 reduction was the third interest-rate cut this year after Banco de Mexico reduced the overnight lending rate by 25 basis points in September and by a half-point in March. Prior to that, the bank hadn’t touched borrowing costs since lowering them 3.75 percentage points in 2009.

Inflation Forecast

A report yesterday from the national statistics agency showed Mexican consumer prices rose in October by the most in seven months as electricity costs climbed, deepening expectations that central bankers will refrain from cutting interest rates again.

The central bank on Nov. 6 raised its forecast for inflation next year to 3.5 percent, a week after Governor Agustin Carstens said policy makers shouldn’t reduce interest rates again because tax increases will add to pressure on prices in the short term.

The new taxes approved by Congress last week will have a moderate and temporary impact on consumer prices, and the balance of risks for inflation have improved, the majority of policy makers said in today’s minutes.

Congress approved an 8 percent levy on junk food, a 1 peso-per-liter duty on sugary drinks, and raised the sales tax at the northern border to 16 percent from 11 percent.

‘Not Necessary’

“Taking into consideration the impact of the fiscal reform, a rate below 3.5 percent at this time is not necessary, adequate for the convergence” of inflation to the central bank’s 3 percent target, Carstens said in an Oct. 30 interview.

The central bank on Nov. 6 cut its growth forecast for this year to a range of 0.9 percent to 1.4 percent from 2 percent to 3 percent.

Retail sales and industrial production unexpectedly fell in August from a year earlier, adding to signs that economic weakness from the first half of the year continued in the third quarter.

“The risks to the downside for growth in the Mexican economy, while they are less than in the most recent months, remain elevated,” the central bank said in the Nov. 6 quarterly inflation report.

Before it's here, it's on the Bloomberg Terminal.