Mexico Central Bank Cuts ’15 GDP Forecast for Second Time

Mexican policy makers reduced their 2015 growth forecast for the second time following a slump in global oil prices and a decline in domestic output.

Gross domestic product will expand 2.5 percent to 3.5 percent this year, down from the previous forecast of 3 percent to 4 percent, the central bank said in the quarterly inflation report published Wednesday on its website. It reduced the 2016 growth estimate to between 2.9 percent and 3.9 percent from 3.2 percent to 4.2 percent.

Banco de Mexico has kept the overnight borrowing rate at a record-low 3 percent in its past five policy meetings to boost an economy that grew less than estimated in eight of the past 10 quarters. The central bank on Wednesday signaled that leeway for further cuts is limited given the peso’s weakness, expectations for improvement in Mexico’s economy and the outlook for the Federal Reserve to raise U.S. borrowing costs.

“Due to a less favorable external environment, the downward trend in oil production and the prevailing weakness in some components of domestic demand, we’re lowering our forecasts for Mexico’s GDP growth,” policy makers said in the report.

Swaps Drop

Interest-rate swaps dropped and the peso strengthened as the central bank report and Federal Reserve comments spurred traders to bet that Mexico will take longer to raise borrowing costs. Fed officials indicated Wednesday in minutes from their last meeting that they’re inclined to keep rates near zero for longer amid concerns about growth risks. Mexico still hasn’t seen signs of a strong recovery in domestic consumption in the short term, Banco de Mexico said.

The peso reversed an earlier loss, strengthening 0.4 percent to 14.8573 per U.S. dollar at 3:16 p.m. in Mexico City. The currency weakened 12 percent against the dollar in the six months through Tuesday and trades near a five-year low. One-year swaps fell 0.08 percentage point to 3.73 percent.

“Banxico is very much focusing on relative monetary conditions and what happens with the Fed,” Juan Carlos Alderete, a currency strategist at Grupo Financiero Banorte SAB in Mexico City, said in a telephone interview. “Whatever movement indicates a delay for the Fed should be followed by the possibility of Banxico postponing the first rate hike as well.”

Rate Increase

Policy makers probably will keep borrowing costs unchanged until the third quarter, when they’ll raise them for the first time since 2008 as the Federal Reserve increases rates, according to the median forecast of economists surveyed by Bloomberg.

The central bank reiterated that going forward it will pay particular attention to monetary policy relative to the U.S., the exchange rate’s impact on inflation and the degree of economic slack given expectations for a recovery. The bank repeated that the peso remaining at current levels for a prolonged period or weakening further could spur inflation.

Central bank governor Agustin Carstens said that the central bank welcomes budget cuts announced last month, and they’re important for preserving the nation’s financial stability. Mexico also needs to improve the rule of law, the central bank said in today’s report.

A decline in oil prices, which have dropped by about half since the beginning of June, prompted Finance Minister Luis Videgaray to announce a government spending cut of 0.7 percent of GDP on Jan. 30.

Inflation Forecast

Banco de Mexico reiterated its forecast for inflation to end 2015 slightly below the 3 percent target, and it will remain near the target in 2016, according to the quarterly report. It had the same forecast for core inflation. The annual inflation rate fell to 3.07 percent in January, the lowest in almost four years, from 4.08 percent in December as tax increases in the same month of 2014 dropped out of the equation.

Banxico has been on hold since June after cutting the key rate 1.5 percentage points in the previous 15 months to boost an economy that has been dragged down by weak domestic demand. Policy makers had already cut their 2015 growth forecast in November, reducing it from between 3.2 percent and 4.2 percent.

GDP is still expected to grow faster than the average for Latin America. Analysts surveyed by Bloomberg forecast growth will accelerate to 3.4 percent this year, more than twice the 1.5 percent projected for the region as a whole and up from 2.1 percent in 2014.

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