CORRECTED-UPDATE 2-Mexico central bank cuts interest rates, first time since 2009

Fri Mar 8, 2013 11:57am EST

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(Corrects rate in second par)
    * Banco de Mexico cuts benchmark rate by 50 basis points
    * Drags borrowing costs to record low of 4.0 percent
    * One-off cut recognizes success in fighting inflation

    By Krista Hughes and Michael O'Boyle
    MEXICO CITY, March 8 (Reuters) - Mexico's central bank cut
interest rates on Friday for the first time in nearly four
years, taking borrowing costs to a new record low as
policymakers bet they are winning the battle against inflation
in Latin America's second-largest economy.
    The Banco de Mexico cut benchmark borrowing costs by 50
basis points to 4.0 percent, a move predicted by only five of 21
analysts polled by Reuters last week.
    Although policymakers had said at their last meeting that
looser policy was possible if both slower growth and inflation
continued, most had not expected the central bank to act so
quickly.
    The move surprised markets and most analysts who have
watched the central bank hold its key rate steady since mid-2009
and back away from previous signals that it might tweak
borrowing costs in either direction.
    "This change recognizes the success in the medium term in
bringing down inflation and will help the economy adjust to a
scenario of lower economic growth and inflation," the central
bank said in a statement, noting that the cut was not the start
of a cycle.

 
    
    The statement made it clear the cut is a one-off move aimed
at bringing Mexico into line with easy money policies in major
economies. It also reflects the central bank's view that
inflation is on a steady downtrend toward its 3.0 percent
target, after making a structural break from past years of price
pressures.
    Mexico's peso whipsawed on the decision, briefly
weakening before surging to a session high. Analysts said the
fact that the cut was seen as a one-time event should not erode
support for the currency.
    Yields on short-term interest rate swaps fell after
the decision as many had not tipped a cut so soon, while bond
yields rose as investors who had been betting on a cut took
profits.
    "This was not completely priced in. It is a good move by the
central bank, it is a recognition by the central bank that is
has been successful on inflation," said Alonso Cervera, an
economist at Credit Suisse in Mexico City.
    Policymakers shrugged off a quickening in the inflation rate
to 3.55 percent in February and said slow growth and continued
slack in the labor market would help keep prices in check.
    The central bank said inflation is expected to tick up
further in coming months to 4 percent before falling back to
around 3 percent by the second half of the year. It is then seen
holding around that level next year.
    The decision was also a response to foreign investment
inflows, which have poured into Mexico due to its relatively
high interest rates. Those flows could strengthen the peso and
effectively tighten monetary policy in Mexico, whether the
central bank wants it or not.
    The Banco de Mexico famously has a hands-off approach to the
peso currency and markets, unlike many of its emerging market
peers. But it is still concerned about stock and bond inflows
which totaled $80 billion last year, and hopes that a lower rate
of return will give investors pause. 
    
    LONG TIME COMING
    Mexico's economy is seen slowing this year to 3.5 percent
growth from a 3.9 percent expansion in 2012, and the sharp slump
in exports and retail sales at the start of the year had fanned
concerns about the impact of weaker U.S. growth.
    The central bank said the main risk to growth in the short
term was spending cuts in the United States, which buys 78
percent of Mexico's goods exports.
    The cut, the first decision under a new composition of the
Banco de Mexico board, is the culmination of a case Governor
Agustin Carstens has been making since his appointment in 2010.
    Then, he argued that rock-bottom rates in major economies
had created a low-inflation atmosphere where Mexico could cut
credit costs without stoking prices. In early 2012, the central
bank also signaled it would like to lower rates.
    But both times the flirtation with a cut was stifled by
global market turmoil hammering the peso and threatening to fan
inflation through higher import prices.
    Carstens may have been aided in his arguments this time by
new board member Javier Guzman, who replaced Jose Sidaoui, seen
as one of the board members most concerned about inflation.
    The Banco de Mexico did not say whether the decision was
unanimous - information that will come with the release of the
meeting minutes in two weeks - but deputy governor Manuel
Sanchez had urged caution on declaring inflation under control.
 
    "To a certain degree, Mr. Carstens is trying to realign with
all the rate cutting that is occurring across the line of
central banks. He's effectively thrown himself into that mix
with other rate cutters," said Enrique Alvarez, an analyst at
IDEAglobal in New York.

 (Reporting by Krista Hughes and Michael O'Boyle; editing by
Clive McKeef, G Crosse)
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