Mexican central bank cuts rates, flags higher inflation risk

MEXICO CITY (Reuters) - The Mexican central bank on Thursday cut its benchmark interest rate to 7.25%, as expected, citing softening headline inflation and slack in the economy, but highlighted concern that a recent minimum wage hike could stoke price pressures.

FILE PHOTO: The facade of the Bank of Mexico building is pictured in downtown in Mexico City, Mexico February 28, 2019. REUTERS/Daniel Becerril

The five-member board of Banxico, as the Bank of Mexico is known, voted 4 to 1 to lower the rate by 25 basis points, the post-meeting statement showed. One member wanted a 50 basis point cut to 7.0%.

The decision marks the bank’s fourth straight cut.

“For 2020, core and headline inflation will reflect both the greater amount of slack in the economy and the cost-related pressures resulting from the recent minimum wage revisions, which could locate them moderately above the levels anticipated in the last quarterly report,” the statement said.

Mexico on Monday agreed to raise the daily minimum wage by 20%, the second consecutive major increase, prompting some experts to warn the large hike could make it challenging for Banxico to keep core inflation under control.

Following the rate decision, Central Bank Governor Alejandro Diaz de Leon said the salary hike could impact jobs and prices in some sectors of the economy.

“It could create cost pressure, which could bring about unfavorable effects on jobs as well as price increases,” he told a Mexican radio program.

Inflation eased to 2.97% in November, just below the central bank’s target of 3%. But, core inflation, which strips out some volatile elements, was higher at 3.65%.

A Reuters poll found that all 16 analysts surveyed expected Banxico to lower the benchmark rate to 7.25%.

On economic growth, Banxico said that “although available information for the fourth quarter of 2019 is limited, the weakness that economic activity has been exhibiting for several quarters is expected to persist.”

Mexico’s economy entered a mild recession during the first half of 2019 and was flat in the third quarter.

“This implies that negative slack conditions have widened with respect to those observed in the previous quarter,” the bank said.

A deal on a revised U.S.-Mexico-Canada Agreement (USMCA) trade accord by the governments of those nations has helped Mexican financial assets and the peso currency, said Banxico.

The Mexican peso is trading near a five-month high.

Reporting by Anthony Esposito; Editing by Dave Graham, William Maclean and Chizu Nomiyama