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As Mexico's peso hits historic low, central bank's expected rate cut in doubt

MEXICO CITY, March 9 (Reuters) - The Mexican central bank’s room to cut rates was seen to be shrinking after the peso sank to a historic low on Monday and inflation ticked up, while fears over the fast-spreading coronavirus reverberated through the global economy.

Following the U.S. Federal Reserve’s surprise rate cut on Tuesday, the markets had baked in the expectation that Banxico, as Mexico’s central bank is known, would also cut its benchmark interest rate when it holds its next monetary policy meeting on March 26.

A Citibanamex survey among 25 analysts on Thursday forecast Banxico would reduce the key interest rate by 50 basis points in Latin America’s second-largest economy, 25 basis points more than a forecast two weeks prior.

But several analysts are now predicting the expected rate cut will not materialize after the peso, as measured by the interbank lending rate, plunged 14% in intra-day trading on Monday, falling to an all-time low of 22.929 per dollar.

The Mexican currency later trimmed losses to trade about 5% weaker against the dollar.

Higher-than-expected inflation was seen as another obstacle to the bank slashing rates. Data published on Monday showed that consumer prices rose 3.70% in the year through February, drifting further above the central bank’s 3.0% target rate.

“In the past, they probably would have raised interest rates in response to such a fall in the peso ... But as things stand, a rate cut at the (next) meeting is probably off the cards,” said William Jackson, chief emerging markets economist at Capital Economics.

While the weaker peso, headed for its fifth straight day of losses on Monday, could help lift Mexico’s exports by making them more competitive, an “environment of weakening global demand may blunt that effect,” Jackson said.

Demand has been sapped as the virus, which has infected more than 110,000 people and killed over 3,800 worldwide, shows no signs of slowing and sows fears about an impending global recession.

Those same concerns saw Wall Street’s main indexes drop 7% and the Dow Jones Industrials crash 2,000 points in what would be its biggest one-day fall ever, as trading resumed following a 22% slump in oil prices.

It could hardly have come at a worse time for the Mexican economy, after it shrank by 0.1% in 2019, the country’s first economic contraction in a decade.

“A much weaker peso is bad for the economy ... the sharp drop of the peso adds to already elevated macro uncertainty in a country where growth over the last seven quarters has been zero and that saw per-capita GDP decline by 1.1% last year,” Goldman Sachs economist Alberto Ramos said.

Uncertainty over some of President Andres Manuel Lopez Obrador’s unorthodox economic policies, the trade relationship with the United States, and the U.S.-China trade dispute, helped drag down the Mexican economy.

Lopez Obrador, however, was optimistic that the peso would bounce back.

“We think it’s going to recover, I’m optimistic because we have healthy public finances, good reserves and no deficit,” Lopez Obrador said at his daily press conference. (Reporting by Anthony Esposito; Additional reporting by Miguel Angel Gutierrez and Raul Cortes Fernandez; Editing by Drazen Jorgic and Steve Orlofsky)

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