May 5, 2020 / 2:57 PM / a month ago

Some Mexico central bank officials want deeper rate cuts, minutes show

MEXICO CITY (Reuters) - Mexico’s central bank is likely to cut interest rates further, with some members of its governing board backing deeper reductions in borrowing costs to shield the economy from the shock of the coronavirus pandemic, minutes from its latest policy meeting showed on Tuesday.

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

All five members of the Bank of Mexico’s board voted unanimously to lower the overnight interbank interest rate by 50 basis points to 6% at an April 21 out-of-cycle meeting, and the central bank unveiled some $31 billion in support for the financial system to help the economy weather the coronavirus pandemic.

One board member argued the most prudent course was to substantially lower the policy rate, so the real interest rate is below its neutral level as soon as possible, including the possibility of moving towards a real rate close to zero or even in negative territory, according to the minutes.

“Despite the unanimous decision, the minutes reflect that views among board members are not homogeneous. While most members embrace prudence in the easing process amid risks of fiscal deterioration and credit rating downgrades, there are views in favor of getting faster into an expansionary stance of monetary policy,” Morgan Stanley said in a research report.

Morgan Stanley expects another 50-basis-point cut at the upcoming May 14 policy meeting, while Goldman Sachs economist Alberto Ramos said in a separate report he expects the central bank to drive the policy rate down to 4.50% by the end of 2020.

Mexico’s economy is facing an unprecedented shock in the coronavirus pandemic, and “idiosyncratic” factors, such as the recent credit ratings downgrades of the sovereign and state oil firm Pemex, are making matters worse, according to the minutes.

Most of the Bank of Mexico’s board members “warned that the adverse environment the domestic economy is facing resulting from the pandemic and the lower oil prices is worsened by idiosyncratic factors,” according to the minutes.

“In this context, most members highlighted the recent downgrade of the sovereign and Pemex’s credit rating by three agencies,” the minutes added.

All of the board members said Mexican economic activity is forecast to contract “significantly” during the first half of the year, and underscored that the magnitude and duration of the pandemic’s effects are still unknown.

The economic shock from the pandemic is already clearly visible in the Mexican economy and forecast declines in global economic activity are of a magnitude not seen since the Great Depression, according to the minutes.

Most of the bank’s board members said the impact is evident in consumer and business confidence, credit card spending, manufacturing orders, purchasing managers’ indexes, car sales, air and land transportation and hotel occupancy and tourism flows.

Reporting by Anthony Esposito in Mexico City; Additional reporting by Miguel Angel Gutierrez; Editing by Frank Jack Daniel, Matthew Lewis and Paul Simao

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