Mexico cuts rate 10th time as inflation ticks higher

August 13, 2020

By CentralBankNews.info

Mexico’s central bank lowered its policy rate for the 6th time this year and for the 10th time in a row, adding future policy decisions would be consistent with an “orderly and sustained” convergence of inflation to its target in light of the large impact on productive activity and the evolution of the financial shock the country is experiencing.

     The Bank of Mexico, known as Banxico, cut its target for the overnight interbank interest rate by another 50 basis points to 4.50 percent and has now cut it 275 basis points this year following cuts in February, March, April, May and June.
     Since August 2019, when the central bank began unwinding 500-basis-points of rate hikes in the three years from December 2015 to December 2018, the rate has been cut by 375 points.
     Unlike the governing board’s unanimous decision in June, one member today voted to cut the rate by only 25 basis points to 4.75 percent. Today’s rate cut was widely expected.
     “Looking ahead, the available room for maneuver will depend on the evolution of the factors that have an incidence on the outlook for inflation and its expectations, including the effects that the pandemic might have on both factors,” Banxico said.
      Mexico’s inflation rate rose for the fourth month to 3.62 percent in July from 3.33 percent in June due to higher energy prices.
     While expectations for headline inflation for the end of the year also rose, the central bank said medium and long-term expectations remain relatively stable, albeit above the bank’s 3.0 percent target.
     Mexico’s economy has been in recession since 2019 and in the second quarter gross domestic product shrank by 18.9 percent year-on-year after a 1.4 percent contraction in the first quarter.
     Data shows a recovery of activity in June in response to the opening of some of the economy and an easing of restrictions along with a moderate recovery of external demand.
     But uncertainty still prevails and Banxico expects the economic slack to continue along with significant risks to the downside.
     The Bank of Mexico issued the following statement:

“Banco de México’s Governing Board decided to lower the target for the overnight interbank interest rate by 50 basis points to 4.5%, effective August 14, 2020.

Available information indicates that after having declined sharply in March and April, the global economy began to show a slight recovery in May and June. Multilateral organizations and analysts anticipate a strong contraction during this year and a moderate recovery for 2021. These forecasts, however, are subject to a high degree of uncertainty. In advanced economies headline and core inflation are below their central bank’s targets. In this context, the monetary authorities have kept policy rates at historically low levels and have continued to use their balance sheets to foster an orderly functioning of financial markets. Likewise, several countries have announced additional fiscal stimulus to mitigate the adverse effects on employment and on households and firms’ income.

Since the last monetary policy decision, global financial markets continued to exhibit a positive behavior, reflecting the effects of the fiscal, monetary and financial stimuli measures adopted by the advanced economies and the gradual reopening of their productive activities, although the conditions prevailing before the pandemic have not been reached. In Mexico, the peso traded in a narrow range, with some episodes of volatility. Government bond yields decreased throughout the yield curve. Global and domestic financial conditions will continue to be subject mainly to the effects of the pandemic.


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Timely information indicates that economic activity in Mexico contracted significantly during the second quarter of the year as the negative effects of the pandemic intensified substantially. Various indicators point to a recovery in June from low levels of activity, in response to the reopening of some sectors, the loosening of restrictions to mobility, and a moderate recovery of external demand, although an environment of uncertainty prevails. For this reason, greater economic slack is expected within the time frame in which monetary policy operates and significant risks to the downside persist.

Annual headline inflation rose from 3.33 to 3.62% between June and July 2020 due to increases in both its non-core and core components. This results from an increase in energy prices as well as a recomposition of core inflation, with a decrease in services inflation and merchandise inflation accelerating with high annual rates of change in food products. These adjustments are partly associated with the pandemic and led to an increase in headline inflation expectations for the end of 2020, while those for the medium and long terms have remained relatively stable, albeit at levels above the 3% target.

The challenges for monetary policy posed by the pandemic include both the significant impact on economic activity as well as a financial shock and their effects on inflation. Although the recent increases in headline and core inflation affect their foreseen trajectories in the short term, both are expected to lay around 3% within the 12-24 month forecast horizon. It is worth noting that these forecasts are subject to considerable risks. To the downside: i) a greater than expected impact of the widening of the negative output gap; ii) downward inflationary pressures worldwide; and iii) social distancing measures reducing the demand for certain services. To the upside: i) additional episodes of foreign exchange depreciation; ii) a greater persistence of core inflation; and iii) logistical and supply-related problems concerning certain goods and services, as well as cost-related pressures associated with the adoption of sanitary measures. In this context, the balance of risks for inflation remains uncertain.

Taking into account the referred risks for inflation, economic activity and financial markets, major challenges arise for monetary policy and for the economy in general. Based on the foreseen scenarios, and considering the room for maneuvering that on balance these provide to monetary policy, with the presence of all its members, on this occasion, Banco de México’s Governing Board decided by majority to lower the target for the overnight interbank interest rate by 50 basis points to a level of 4.5%. One member voted for lowering the target to 4.75%. Looking ahead, the available room for maneuver will depend on the evolution of the factors that have an incidence on the outlook for inflation and its expectations, including the effects that the pandemic might have on both factors.

The Governing Board will take the necessary actions on the basis of incoming information and considering the large impact on productive activity as well as the evolution of the financial shock that we are currently facing, so that the policy rate is consistent with the orderly and sustained convergence of headline inflation to Banco de México’s target within the time frame in which monetary policy operates. Perseverance in strengthening the macroeconomic fundamentals and adopting the necessary actions, regarding both monetary and fiscal policies, will contribute to a better adjustment of domestic financial markets and of the economy as a whole.”

www.CentralBankNews.info

Mexico’s central bank is seen cutting its key interest rate next week to the lowest level in four years, despite inflation that is slowly ticking upwards, to help assuage the economic fallout of the coronavirus pandemic, a Reuters poll showed Friday.

At the next monetary policy meeting on Thursday, the Bank of Mexico is forecast to reduce the benchmark interest rate MXCBIR=ECI by 50 basis points to 4.50%, according to 20 of 24 analysts’ projections.

That would mark a tenth consecutive reduction and bring rates to levels not seen in four years.

Three analysts forecast a cut of 25 bps and another saw a hold.

Annual inflation in July rose to its highest in five months, but forecasts for Banxico to cut rates were likely unchanged as the rise in consumer prices was in line with expectations.

“In all, given the deep recession, timid fiscal response, and the still high level of nominal and real rates, the inflation backdrop should not preclude the central bank from easing further in coming months,” said Goldman Sachs economist Alberto Ramos.

Mexico entered a recession in 2019 and the economy is expected to shrink by up to 10.5% this year, in what Finance Minister Arturo Herrera has said would be its steepest decline since the Great Depression in the 1930s.

Gross domestic product shrank by a historic 17.3% in the second quarter from the previous three months as the pandemic shut factories, kept shoppers and tourists at home and upended trade.

The central bank is due to publish its latest monetary policy decision on Thursday at 1300 (1800 GMT).

jul 31 Central bank deputy governor Gerardo Esquivel said there may be more than one interest rate cut in the pipeline for Mexico this year as policy makers have room to keep easing monetary policy.

One of the five board members who decide on rates, Esquivel said in a video interview that a recent uptick in inflation was not surprising and won’t likely persist. He wouldn’t rule out the possibility of having real rates — once inflation is subtracted — falling into negative territory if conditions warrant and if necessary.

“Depending a bit on how prices keep evolving going forward, we may or may not take this space that some of us consider to exist in interest rates,” he said. “We will see if there’s room to do so in subsequent decisions that we will take in August, and in September, and more toward the end of the year.”

Mexico’s central bank has slashed borrowing costs by 3 percentage points to 5% over the past 12 months, accelerating its easing cycle once the coronavirus pandemic hit the country in March. Real rates are still one of the highest among G-20 nations and economists on average only see one more cut this year, in August, even as the economy is set to contract 9.6%.

Esquivel added that he didn’t know what would happen after August and that it would depend on how several indicators perform.

He joined the central bank board early last year, after being tapped by President Andres Manuel Lopez Obrador. While initially voicing his dissent with the rest of the usually hawkish board, Esquivel has lately been agreeing with the pace and magnitude of the bank’s easing cycle.

“I’ve voted in all of the most recent decisions along with the rest of the board members, not necessarily because I’m in agreement with the level of the rate; I’ve always said it was very high,” Esquivel said. “But given where we started, it seems the rhythm at which we’ve cut is appropriate due to the situation of the country and what the inflation rate permits.”

Gradual reductions have helped reestablish order in Mexico’s financial markets, he added.

Temporary Jump

Inflation sped up in early July more than economists expected to 3.59%, from 2.15% in April, propelled by rising food and gasoline prices. The central bank targets inflation at 3%, plus or minus 1 percentage point.

Esquivel pointed out that many reasons may be behind higher food costs, including people paying more to shop closer to home and companies taking advantage of the virus-driven lockdown. “We can think of many factors that could explain this behavior, none of which seems to me would cause persistence in inflation going forward,” he said.

Esquivel said he wouldn’t seek negative real rates and it shouldn’t be an objective, but if inflation dips below or close to target, “I’d have no issue personally in doing so if the circumstances supported it.”

Mexico’s economy posted a record 17.3% contraction in the second quarter compared with the previous three months, according to preliminary data released Thursday. A haphazard national response to the pandemic hurt jobs and output while failing to slow the outbreak, posing a challenge to Lopez Obrador.

It will take until the end of 2022 for output to return to pre-pandemic levels, Esquivel said, voicing a similar forecast to that of the Finance Ministry. Some experts are more pessimistic: Jessica Roldan, an economist at Mexican brokerage Finamex, said it will take seven years for GDP to recoup levels seen before the crisis.

CITY, July 29 (Reuters) – Mexico’s battered economy may not recover to levels seen before the coronavirus crisis until 2022 as it is poised to suffer the biggest quarterly contraction on record, a member of the Mexican central bank’s board said on Wednesday.

Echoing predictions from independent economists, Gerardo Esquivel, one of the Bank of Mexico’s five board members, said the country’s gross domestic product could contract between 8.5% and 10.5% this year.

The bank’s deputy governor, Jonathan Heath, stressed in a separate presentation that the cycle of expansive monetary policy has not come to an end, suggesting further interest rate cuts could occur.

At the last monetary policy meeting, the bank cut the benchmark interest rate by 50 basis points to 5.00%, the lowest level in nearly four years.

Economic activity likely fell as much as 20% in the second quarter when compared with a year earlier, said Esquivel, adding that spending on tourism, transportation, restaurants and fast food have remained far below expected levels even through end-July.

Esquivel and Heath, the two board members appointed since President Andres Manuel Lopez Obrador took office in December 2018, have at times pushed for aggressive rate reductions.

The government has been criticized for not spending more, or taking on new debt, to address the crisis.

But Esquivel said in Mexico, which faces pressure on its public finances and risks losing its coveted investment grade rating, a significant increase in debt could be excessively costly.

Still, he warned against cutting spending, which could make economic recovery more difficult.

 July 21 (Reuters) – Mexico’s central bank will likely cut its interest rate by 50 basis points at its next monetary policy meeting in August and keep borrowing costs at 4.50% until the end of next year, according to a survey by Citibanamex published on Tuesday.
Mexico’s peso is projected to reach 22.80 per dollar by the end of the year and 22.44 by the end of next year, the survey said. The peso exchange rate on Tuesday was 22.32 per dollar.
The next monetary policy meeting of Banxico, as the central bank is known, is scheduled for Aug. 13. (Rep