Mexico cuts interest rate for first time in five years

Follows U.S. as economy falters, inflation slows

Mexico’s central bank reduced borrowing costs for the first time in five years after inflation slowed, the economy faltered and the U.S. cut its own rate.

The peso weakened before paring declines to post gains.

Led by Governor Alejandro Diaz de Leon, the bank’s board voted four to one to lower rates a quarter-point to eight per cent from a 10-year high.

The decision was forecast by 14 of 31 economists surveyed by Bloomberg. Sixteen saw rates on hold, while one analyst predicted a halfpoint reduction.

Investors were also split on which way the central bank would swing after the five-member board showed divisions in its previous meeting in June.

Two members had expressed a dovish stance, while the majority raised concern about high core inflation and a deeply uncertain global environment.

Then, last month, President Andres Manuel Lopez Obrador broke from his strict non-interventionist stance to tell Bloomberg he’d like to see a rate cut.

“I thought they would give more guidance, but they just cut and kept the door open for any move,” said Marco Oviedo, chief Latin America economist for Barclays, who had predicted rates on hold. “So my best guess now is that they will follow the (U.S.) Fed.”

Slowing inflation, economic slack and yield-curve performance were among reasons for easing, the central bank said in the statement accompanying its decision.

But policy-makers insisted they would remain prudent and act swiftly if

I STILL THINK THEY WILL CONTINUE TO CUT IF MARKETS ALLOW THEM. — ECONOMIST ALONSO CERVERA

MY BEST GUESS NOW IS THAT THEY WILL FOLLOW THE (U.S.) FED.

risks to reaching the inflation target appear.

The board added that uncertainty that could impact inflation persists while the growth outlook remained negative.

Investors were leaning slightly toward easing on Thursday as forecast by interest-rate swaps.

Their argument went: the 3.78-per-cent inflation rate is the lowest in 30 months, the economy narrowly dodged recession in the second quarter and in addition to the Fed, Brazil and Chile just lowered borrowing costs.

Naysayers warned that 3.82-per-cent core inflation remains high, trade war risks with the United States abound, and Argentina’s assets just fell off a cliff after a primary election there stoked concern South America’s second-biggest economy will return to populist policies.

Manuel Sanchez, a former central bank board member known for his hawkish views, had said before the decision that Banxico hadn’t properly prepared the market for lower borrowing costs this time around and could lose credibility that’s a key element to controlling inflation if it eases too soon.

Credit Suisse economist Alonso Cervera, who predicted a rate reduction for Thursday, said more easing is likely on the way if the peso doesn’t weaken sharply. “I still think they will continue to cut if markets allow them,” he said.

Fitch Ratings agreed: “We still think Banxico will stay vigilant given domestic policy risks and the potential for risk aversion to affect the exchange rate,” wrote Charles Seville, co-head of Latin America sovereigns at Fitch Ratings.

“But depending on the trajectory of Fed rates, the door may be open to further rate cuts.”