Thursday, February 13, 2020

Mexico cuts rate 5th time, global risks still to downside

     Mexico's central bank lowered its benchmark interest rate for the fifth time, saying the balance of risks to the global economy remain to the downside due to a range of uncertainties, "including the effects of the recent coronavirus outbreak," despite a further easing of global financial conditions.
     The Bank of Mexico, known as Banxico, cut its target for the overnight interbank interest rate by 25 basis points to 7.0 percent and has now cut it five times and by a total of 125 points since July 2019 when it began to unwind some of the 500-point rate hikes in the three years from December 2015 to December 2018.
     "Economic slowdown, low inflation, accommodative monetary policies, and lower interest rates continue to prevail in the world economy," said the central bank, adding the bank's board was unanimous in its decision.
     In a new and more concise policy statement, aimed at getting is message more easily across to the public, Banxico said the prevalence of external and domestic risks could affect domestic financial markets, adding the peso's exchange rate and yields on government securities had fallen in recent weeks.
      Economic activity in Mexico has stagnated for several quarters, and the economy is is now seen growing less than forecast in the third quarter quarterly report, the central bank said, without providing further details.
     In its quarterly inflation report released in November Banxico lowered its estimate of 2019 economic growth to between a contraction of 0.2 percent and growth of 0.2 percent, down from an earlier forecast of 0.2 - 0.7 percent growth.
     In the fourth quarter of 2019, Mexico's gross domestic product shrank an annual 0.3 percent, the same as in the third quarter, with growth for the full year estimated to contract 0.1 percent, sharply down from 2018 growth of 2.1 percent.
     For 2020 Banxico cut its growth forecast to 0.8 - 1.8 percent from 1.5 - 2.5 percent and forecast growth in 2021 of 1.3 - 2.3 percent.
     In January Mexico's consumer price inflation rate rose 3.24 percent, within the central bank's target of 3.0 percent, plus/minus 1 percentage point.
     The central bank has recently warned that a 20 percent hike in minimum wages by Mexico's government in December, the second major increase in as many years, could push up inflation and make it difficult to bring inflation down to its target this year.
     Mexico's peso has been rising this year and rose further after the rate cut to 18.63 to the U.S. dollar, up 1.6 percent this year.

     The Bank of Mexico released the following press release:

"Banco de México’s Governing Board has decided to lower the target for the overnight interbank interest rate by 25 basis points to 7%.

Economic slowdown, low inflation, accommodative monetary policies, and lower interest rates continue to prevail in the world economy. Although in this context global financial conditions have continued to loosen, the balance of risks for world economic activity remains biased to the downside due to several factors of uncertainty, including the effects of the recent coronavirus outbreak. In this context, over the last weeks the peso exchange rate appreciated and interest rates on government securities of all maturities decreased. Nevertheless, external and domestic risks prevail which could affect the performance of domestic financial markets.

Economic activity in Mexico has remained stagnant for several quarters, with a generalized weakness in aggregate demand components. Thus, slack conditions have continued to widen. Based on most recent data, GDP in 2020 is foreseen to grow less than estimated in the Quarterly Report July-September 2019, with a balance of risks biased to the downside.

Between November 2019 and January 2020 annual headline inflation rose from 2.97% to 3.24%, mainly due to the increase in the non-core component from 0.98% to 1.81%, while core inflation did so from 3.65% to 3.73%. Core inflation was affected by the increase in the prices subject to the excise tax (IEPS, for its acronym in Spanish) and continues to show resistance to decline. Short-, medium- and long-term headline inflation expectations have remained relatively stable, albeit at levels above 3%, while core inflation expectations for the same terms were revised upwards.

In light of the recent behavior of the factors affecting the foreseen path of inflation, headline and core inflation are expected to be moderately above the forecasts published in the last Quarterly Report. Regarding risks to the foreseen trajectory for inflation, those prevailing to the upside include: core inflation’s resistance to decline; wage increases affecting the labor market and prices; a possible exchange rate adjustment due to external or domestic factors; increases in agricultural and livestock prices greater than expected; and a deterioration of public finances. As for downside risks: a further appreciation of the peso exchange rate; lower international prices of energy goods due to the coronavirus outbreak; and a greater economic slack. In this context, uncertainty still persists regarding the balance of risks for the referred trajectory of inflation.

With the presence of all its members, Banco de México’s Governing Board decided unanimously to lower the target for the overnight interbank interest rate by 25 basis points to 7%. To this end, the current levels of headline inflation, the inflation outlook within the time frame in which monetary policy operates, the greater amount of economic slack, and the recent behavior of external and domestic yield curves, were considered.

The Governing Board will take the necessary actions based on incoming data 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. To strengthen the macroeconomic framework and the country´s growth capacity, in addition to a prudent monetary policy, public finances must be consolidated in a sustainable way."


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