Mexico Policy Makers Signal Unlikely to Raise Ahead of Fed

Mexico’s central bank signaled it will keep the key interest rate at a record low, at least until the U.S. raises borrowing costs, after the economic outlook worsened.

Policy makers voted unanimously to leave rates unchanged at 3 percent on March 26, as forecast by all 29 economists surveyed by Bloomberg, according to minutes released Thursday. Two of the five board members said the central bank wouldn’t gain much by acting ahead of the Federal Reserve, and that doing so could be an error given sluggish growth.

While a separate report Thursday from the national statistics agency showed consumer prices rose more than analysts expected in March, the annual rate of 3.14 percent remains close to the lowest in more than eight years. The board majority said that it expects price increases to remain near the bank’s 3 percent goal in coming months.

“Banxico is waiting to see the final decision of the Fed in terms of timing,” Marco Oviedo, chief Mexico economist at Barclays Plc, said in a phone interview. “It’s very clear from the discussion that even though they know that the exchange rate could contaminate inflation, a preemptive hike would be a mistake given that there’s uncertainty about the U.S.”

Rate Differential

Mexico’s central bank is concerned a smaller rate advantage versus the U.S. could prompt foreign investors to pull money out of Mexico. The difference between Mexico’s target rate and the Fed funds rate is 2.75 percentage points, the least since Mexico adopted a new benchmark in 2008.

The central bank reduced its 2015 growth forecast for a second time in February following a slump in global oil prices and a decline in domestic output. Mexico’s economy will expand 2.5 percent to 3.5 percent this year, down from the previous forecast of 3 percent to 4 percent, according to the bank.

The peso plunged 11 percent against the dollar in the past six months through yesterday, part of a selloff in emerging-market currencies fueled by the slump in oil prices and the prospect of higher U.S. rates.

The peso extended its decline after the minutes were released, falling 1 percent to 15.0618 per dollar at 11:46 a.m. in Mexico City.

“Monetary policy isn’t going to be a support for the peso, at least in the short term,” Juan Carlos Alderete, a currency strategist at Grupo Financiero Banorte SAB in Mexico City, said in a phone interview. “The pass-through effect from peso weakness to consumer prices has been mild, and it argues for waiting for the Fed given economic weakness in Mexico. This is important because not long ago, people were talking about a pre-emptive hike.”

Fed Increase

After a surprise half-point reduction in June, Mexican policy makers have kept rates unchanged to boost a $1.26 trillion economy that grew less than analysts forecast in eight of the past 11 quarters. The central bank is paying particular attention to Mexico’s monetary posture relative to the U.S. Federal Reserve and the performance of the exchange rate, board members said in the minutes.

The bank probably will keep borrowing costs unchanged until the third quarter, when it will raise them for the first time since 2008 as the Fed lifts rates, according to the median forecast of economists surveyed by Bloomberg.

Two central bank board members said that given “inflation is well-behaved, its expectations remain well anchored, an increase in the yield curve has been orderly and the economic cycle is very weak, not much is gained by anticipating the actions of monetary policy in the U.S., and it could even be a mistake given the cyclical position of the national economy,” according to the minutes.

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