Concerned, but cautious. That sums up the Bank of Mexico’s latest widely-expected 25 basis point rate cut, which brought its benchmark lending rate to 7 per cent, a nearly three-year low.
The bank’s dilemma is how to breathe life into a moribund economy without stoking inflation. At the previous rate-setting meeting, in December, one board member voted for a half-point cut, but consumer prices have since increased to an annual rate of 3.24 per cent in January from 2.83 per cent in December and core inflation also edged up.
“Board members remain concerned about core inflation and medium-term inflation expectations,” Bank of America analysts wrote in a recent note to clients. “We find views across the board are converging to withdraw more monetary tightness but to move cautiously in a data dependent manner.”
On the other hand, growth is still elusive. The economy failed to expand last year for the first time in a decade and Barclays said preliminary data that showed the economy at a standstill in the fourth quarter 2019 could be revised into the red on February 25 after poor industrial production data.
Manufacturing was particularly hard-hit in the fourth quarter, notching up a nearly 9 per cent fall on a seasonally-adjusted basis compared with the third quarter, its worst quarterly fall since June 2009, Barclays chief economist Marco Oviedo pointed out, “The central bank should continue cutting on March 26 as well,” he added.
The central bank said it now expected 2020 GDP growth to be below it’s latest forecast of 0.8 to 1.8 per cent and the inflation to be “moderately above” its goal. The next quarterly report, when the bank will revise its forecasts, is released on February 26.
Thursday’s cut was the fifth in a row, bringing the rate to the lowest since mid-2017. The bank said in a statement the move was unanimous.
The dilemma, JPMorgan analysts said, was that “Banxico seems to think there is little that monetary policy can do to boost growth: in other words, that it is not the cost of capital that is holding down growth (or investment) in particular but rather subdued business sentiment amid economic policy uncertainty”.
However, it said monetary policy appeared to be “an additional drag” on growth prospects. The cut was the second in a row in which Banxico did not follow the US Federal Reserve, which last month left rates unchanged.
Economists are divided about whether the bank will continue to cut after Thursday’s move, or will pause. But the latest Citibanamex market survey found expectations were still for the lending rate to end 2020 at 6.5 per cent.
BBVA economists saw “plenty of room” for further cuts without hurting the strength of the peso. “A looser monetary policy stance is warranted but we expect Banxico to remain cautious as they assess a higher risk premium,” they said in a note.
Source: Economy - ft.com
