Hawks have upper hand as Mexico central bank paces rate cuts

MEXICO CITY (Reuters) - Mexico’s central bank cautioned against steering monetary policy toward helping the country’s stagnant economy, even as tension on its board over how much further interest rates should fall became apparent in a report published on Thursday.

FILE PHOTO: The logo of Mexico's Central Bank (Banco de Mexico) is seen at its building in downtown Mexico City, Mexico February 28, 2019. Picture taken February 28, 2019. REUTERS/Daniel Becerril/File Photo

Minutes of the Bank of Mexico’s last rate-setting meeting on Feb. 13 suggested that most of its five-member board was wary of easing borrowing costs to encourage growth.

“(The majority) indicated that the benefit of using monetary policy to reactivate the economy would be modest, and that the risk of doing so could be high,” the bank said.

Still, the minutes also showed “some” board members felt the current policy stance was still “very restrictive,” reflecting differences of opinion that have been evident at the bank since it began cutting rates in August.

“The minutes present an argument duel between a hawkish majority ... and a dovish minority,” Goldman Sachs economist Alberto Ramos said in a note to clients.

The board unanimously voted to cut its benchmark interest rate by 25 basis points to 7.0% at its last meeting.

Still, the two members of the board appointed since President Andres Manuel Lopez Obrador took office in December 2018, Gerardo Esquivel and Jonathan Heath, have at times pushed for more aggressive rate reductions than the others.

Ramos said despite the “hawkish” tone of the minutes carried by the majority, economic weakness in Mexico was likely to yield more rate cuts in the first half of 2020. Borrowing costs are still at least 100 basis points “above neutral,” he argued.

“However ... the baseline easing path is predicated on a relatively anchored (peso); as currency depreciation/volatility could lead the central bank to pause the easing cycle,” he said.

Mexico’s economy suffered a slight recession last year, and the bank cut its 2020 growth forecast on Wednesday.

But inflation has ticked up since the government pushed through a major increase in the minimum wage for a second straight year. Board members also want to ensure a weaker peso does not fuel price pressures.

Mexico’s central bank targets inflation of 3 percent, and the rate stood just above 3.5% in early February.

The bank’s governor, Alejandro Diaz de Leon, said on Thursday that even if inflation could accelerate in coming months, the rate should be “very close” to 3% in 2021.

Separately, Finance Minister Arturo Herrera said he did not expect the minimum wage hike to fan inflation.

Reporting by Dave Graham and Ana Isabel Martinez; Additional reporting by Drazen Jorgic and Anthony Esposito; Editing by Dan Grebler