Mexico Central Bank Cuts Key Rate for What May Be Last Time

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Mexicos central bank cut its key interest rate to a four-year low with one board member seeking a smaller reduction than the rest amid expectations that the current easing cycle is ending as inflation reemerges.

Banco de Mexico, led by Governor Alejandro Diaz de Leon, lowered borrowing costs by a half point to 4.5%, in line with 22 of 24 estimates in a Bloomberg survey. One of five board members at the bank voted for a quarter-point cut, in line with forecasts from two of the 24 economists in the poll.

Far From Negative

Mexico's real interest rate remains positive after Banxico's reduction

Sources: Mexico's central bank, national statistics agency

Policy makers are caught between the recent pick-up in inflation and what economists expect will be the worst economic contraction in nearly a century as the coronavirus pandemic saps demand. That‘s led to some difference of opinion between economists, who see this as the easing finale, and investors, who think there’s room for one more rate cut.

Analysts surveyed by Citibanamex before the decision expected the central bank to hold rates at 4.5% through the end of next year. Swap rates showed traders scaled back bets on further easing, but still forecast a quarter-point reduction following this weeks decision.

The central bank itself included language about how the coronavirus may impact its future decisions.

“Going forward, the space available will depend on the evolution of factors that impact on inflation perspectives and expectations, including the effects the pandemic may have on both,” the central bank stated in the communique accompanying its decision.

‘Room for Maneuver’

That language appears to leave the door open to further cuts, even if just slightly, said Carlos Capistran, a New York-based economist at Bank of America.

“The split decision and the new sentence regarding the available room for maneuver means that the door is not wide open, but only barely so, given the inflation outlook,” Capistran said. “I think future decisions will very much depend on whatever happens to inflation. Given my inflation forecasts, I think it will be difficult for Banxico to move down further.”

Capistran bucked the consensus and had forecast that the central bank would cut borrowing costs by only a quarter point Thursday.

The bank has already lowered rates 10 times over the past year from 8.25%, the longest easing streak at least since Mexico formally adopted an operating interest rate target in 2008.

Despite some variation, there‘s growing consensus that the end of rate cuts is near after Mexico posted the biggest cost-of-living increase in eight months amid a surge in energy prices. July’s price jump brought annual inflation to 3.62%, above the 3% midpoint of the central banks target range.

(Updates with comments from rate decision statement starting in fourth paragraph)