Mexico interest rate cut hint was three-to-one split: minutes

MEXICO CITY Fri Feb 1, 2013 4:33pm EST

MEXICO CITY (Reuters) - Mexico's central bankers split over whether to send a signal they might cut interest rates if inflation keeps cooling, according to minutes of their January discussions.

Banco de Mexico board members unanimously decided to keep the benchmark interest rate steady at 4.5 percent at their monetary policy meeting two weeks ago, when they surprised analysts by hinting they might lower rates in future.

The hint has prompted markets to price in a 25-basis-point easing by June.

But the minutes showed one of the four board members argued against suggesting a possible cut.

The minutes, released on Friday, also suggested that any cut would be a one-off rather than the start of a new easing cycle, leading some to speculate a cut might be 50 basis points or more.

"The majority of board members considered that the economy could grow at a faster pace without observing inflation pressures, in which case it would be possible to have a lower level of rates without compromising convergence to the inflation goal," the minutes said.

The dissenting board member argued that inflation, which fell to its lowest level in more than a year in early January, was still above the central bank's 3 percent target and said that a cut could be premature. The bank has not changed rates since 2009.

In a change from the statement released after the January meeting, the minutes suggested the central bank might cut rates even if growth accelerates: as long as this does not fan inflation, which fell to 3.21 percent in early January. The statement spoke of rate cuts in the context of lower growth and lower inflation.

Banorte analysts said they now expected a cut of 50-75 basis points at the next meeting in March, although other economists thought a cut in the second half of the year was more likely. Some stuck with bets for no change at all.

"In our view, these have been the most dovish minutes we have ever seen," Banorte analysts wrote in a note to clients.

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Board member Manuel Sanchez, who analysts suspect was the lone dissenter on the cut hint, told Reuters on Tuesday the recent easing in inflation was a good sign for the future although the trend had yet to be consolidated.

The minutes showed most policymakers did not see domestic growth putting pressure on prices and expected inflation would keep on a downward path toward 3 percent in 2013.

"Some members signaled that if a cut is decided, it should be communicated as a one-off correction which fully reflects the gains in the battle against inflation and not as the start of a cycle of relaxing monetary policy," the minutes said.

Although U.S. demand for manufactured goods supported growth last year, most policymakers saw a weak global environment and expressed concern about a slow recovery north of the border, the destination for almost 80 percent of Mexico's exports.

In a worrying sign, the HSBC's Mexico Purchasing Managers' Index showed manufacturing growth eased last month as export orders fell for the first time in more than a year.

A separate poll carried out by the central bank showed analysts saw the economy growing 3.55 percent in 2013, slightly up from a 3.45 percent forecast in the last poll in December, but down from an expected 4 percent expansion in 2012.

They lowered their expectations for inflation in 2013 to 3.67 percent, down from 3.69 percent in the previous survey, according to the average of 32 analysts.

The central bank poll changed its methodology this month, deepening the information on growth and inflation forecasts by including probability distributions as well as median estimates.

Analysts saw more than a 50 percent chance that inflation would come in between 3.6 percent and 4 percent both this year and in 2014. The next most likely scenario for 2014 was inflation of 3.1-3.5 percent.

A Reuters poll also on Friday showed analysts saw Mexico's annual inflation rate cooling in January to its slowest pace in more than a year.

The minutes showed little support for analysts' suspicions that the rate cut hint was aimed at curbing a rise in the peso, which hit a 10-month high on January 17 as policymakers met. Lower rates would make the currency less attractive.

Although "some" board members said foreign inflows were putting upward pressure on the currency, another said if the United States was moving toward slower growth, this would put downward pressure on the peso in the medium term.

(Additional reporting by Alexandra Alper; editing by James Dalgleish and Neil Stempleman)

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