Mexico central bank cuts rate, more reductions on the horizon

MEXICO CITY (Reuters) - For the second time in a row, Mexico’s central bank cut its key interest rate by 25 basis points to 7.75%, as it cited slowing inflation, widening slack in the economy, and expectations for a slight economic recovery.

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. REUTERS/Daniel Becerril

In a majority decision, the Bank of Mexico’s five-member board voted to lower the overnight interbank rate, in line with a Reuters poll of analysts and economists.

Two board members wanted to go even further, voting to cut the rate by 50 basis points to 7.50%, Banxico, as the bank is known, said in its post-meeting statement.

“Considering the reduction of headline inflation, the ample slack in the economy and the recent behavior of external and domestic yield curves, the Bank of Mexico’s governing board decided by majority to lower the target for the overnight interbank interest rate to 7.75%,” Banxico said.

More cuts may be on the horizon given that inflation has cooled below the bank’s own 3% target for the first time in three years, the economy has been sputtering for nearly a year, and two board members called for a more aggressive move.

“Access to credit has been proven one of the key issues for the performance of firms in Mexico. It tends to be very expensive so (rate cuts) would be critical for the reactivation of growth of the Mexican economy,” Mexican Economy Minister Graciela Marquez said at a Bloomberg event in New York.

Softening inflation at home and the U.S. Federal Reserve’s recent rate reduction give Banxico “additional room” to cut, Marquez said, in an unusual intervention.

Goldman Sachs economist Alberto Ramos said barring a major shock to the peso or a significant inflation surprise, he expects Banxico to enact two 25-basis points cuts before the end of 2019, one more than the bank had previously forecast.

Earlier in the day, data from the national statistics agency INEGI showed that Mexico’s economy contracted at the start of the third quarter, dipping 0.1% in July from the previous month in seasonally adjusted terms. The Mexican economy barely escaped a recession in the first half of the year.

Banxico suggested that the worst may be behind Latin America’s second largest economy.

“Although economic activity in the previous quarters and in July remained stagnant, it is expected to recover slightly over the rest of the year,” Banxico said.

Reporting by Anthony Esposito; Additional reporting by Rodrigo Campos in New York; editing by Nick Zieminski and Lisa Shumaker