August 30, 2019 / 6:14 PM / 19 days ago

Bets rise for Mexico rate cut as central bank highlights concern

MEXICO CITY, Aug 30 (Reuters) - Expectations for a September interest rate cut in Mexico are growing after the central bank in recent days slashed its 2019 economic forecast and underscored concerns about slowing growth, domestic demand and private investment.

Known as Banxico, the central bank said economic stagnation reflected weakness in most areas of aggregate demand, especially a slowdown in consumption and lackluster investment, minutes of the Aug. 15 monetary policy meeting showed on Thursday.

Another 25-basis-point rate cut is likely at the September monetary policy meeting, Citibanamex analysts Sergio Luna, Adrian de la Garza and Ivan Arias wrote in a research note.

Banxico board members’ “discussion around global macro-financial conditions shows several important points of concern,” they said.

Earlier this month, central bank cut its key lending rate for the first time since June 2014, lowering it by 25 basis points to 8.00%. It cited slowing inflation and increasing slack in the economy, in a move that fueled expectations further monetary policy easing could be on the way.

The minutes showed a robust discussion of the economy’s weakness which should lead to two more quarter percentage point cuts by year end, “with the next 25bp cut taking place at the September meeting,” said Alberto Ramos, chief Latin America economist at Goldman Sachs.

“The significant downgrade of the 2019-2020 real GDP growth outlook ... and more benign near-term headline inflation path strongly suggest significant room for additional rate cuts without the central bank abandoning its conservative stance,” said Ramos.

Banxico on Wednesday cut its economic outlook for the year to forecast virtually no growth, citing slack conditions that will persist longer than expected after Mexico narrowly avoided entering a recession in the second quarter.

One of Banxico’s board members said that even after the August rate cut “the monetary policy stance in both relative and absolute terms remains restrictive, and an analysis of the underlying risk factors leads to the conclusion that an accommodative cycle should begin,” minutes showed.

Expectations for Latin America’s second largest economy have deteriorated during the first year of leftist President Andres Manuel Lopez Obrador’s term as a brewing global trade war bodes ill for Mexico’s open-market economy.

Additionally, some of the decisions made by Lopez Obrador, an exponent of economic nationalism, have shaken investor confidence in Mexico, dampening hopes for growth. (Reporting by Abraham Gonzalez; Writing by David Alire Garcia; Editing by Anthony Esposito and Tom Brown)

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