Mexico Cuts Key Rate for Fourth Time After Inflation Slows

© Reuters. Mexico Cuts Key Rate for Fourth Time After Inflation Slows

(Bloomberg) — Mexico’s central bank cut its key interest rate for a fourth straight decision after inflation slowed to the 3% target and economic growth crawled to a standstill.

Policy makers on Thursday reduced the overnight rate a quarter point to 7.25%, as forecast by all but one of the 23 economists surveyed by Bloomberg. That still leaves Mexico with restrictive monetary policy and the highest real rate, or borrowing costs minus inflation, in the Group of 20.

Just one member voted for a half-point cut, down from two in recent decisions. While analysts won’t know until the release of minutes Jan. 2 whether all five board members participated, it would be unusual for anyone to miss a meeting, and it’s more likely that a 20% jump in the minimum wage for next year caused either Deputy Governor Jonathan Heath or Gerardo Esquivel to adopt a more gradual approach, said Felipe Hernandez of Bloomberg Economics.

“The decision today clearly shows that the minimum wage is limiting monetary policy flexibility,” said Hernandez, a Latin America economist. “The outlook for cuts of 50 basis points is now lower.”

The central bank said that in 2020 both general inflation and core inflation, which excludes more volatile food and energy prices, could be affected by the minimum wage increase, leading to inflation slightly above the previous forecast. At the same time, limited fourth-quarter data points to continued economic weakness, and the balance of risks for growth remains biased to the downside, the board said.

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Banco de Mexico has cut the rate one percentage point from a decade high in August after inflation slowed more than expected and the economy sputtered. In the previous two meetings, the board was at odds about how fast to cut, with the majority favoring gradual, quarter-point moves given persistent core inflation. President Andres Manuel Lopez Obrador’s appointees supported half-point reductions.

Economists this week warned that core inflation may have trouble slowing much after the government on Monday announced plans for the minimum wage increase, which will bring the hike to almost 40% in just more than a year.

Inflation has faced less pressure from Mexico’s peso, which rallied this month to the highest level since July, at roughly 19 per dollar, reducing pressure on prices. The country’s rate advantage over the U.S. Federal Reserve remains near the highest since the 2009 financial crisis. That means the peso is still an attractive option for carry trade, which refers to when investors borrow in dollars and buy assets in currencies that offer higher yields.

Thursday’s cut marks the first time since the Fed started reducing interest rates in July that the Fed stayed on hold in a decision, on Dec. 11, and Mexico reduced borrowing costs anyway, thus narrowing the difference between the two.

In voting for a larger cut in November, Esquivel argued that a quarter-point reduction was too little, too late. He cited factors including inflation close to the bank’s 3% target, slowing core prices and a general reduction in interest rates globally. Heath listed some of the same reasons for his vote, saying that the tightness of Mexico’s policy hasn’t been reduced relative to the rest of the world, given global easing.

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While Lopez Obrador has repeatedly said that he respects the central bank’s autonomy, in July he said that he’d like policy makers to pay greater attention to growth.

The bank last month cut its 2019 forecast for gross domestic product growth to a range of -0.2% to 0.2%, from the previous 0.2% to 0.7%. Growth this year was held back by low oil output and slumping construction after Lopez Obrador’s decision to cancel a new $13 billion airport for Mexico City.



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