Mexico central bank lowers rates 50 basis points, hints at more cuts

MEXICO CITY (Reuters) - Mexico’s central bank on Thursday lowered its benchmark interest rate to the lowest in 3-1/2 years, hinting more cuts could be on the horizon and warning the coronavirus pandemic’s effects will be felt more strongly in the second quarter.

The five-member governing board of Banxico, as the Bank of Mexico is known, unanimously voted to reduce the key rate by 50 basis points to 5.50%, the lowest since November 2016.

Banxico said it will act on the basis of incoming data to ensure interest rates are consistent with its inflation target, noting that the coronavirus crisis was having “a large impact on productive activity” and causing a financial shock.

“Although the magnitude and duration of the effects of the pandemic are still unknown, these are expected to intensify during the second quarter, and to result in a significant contraction of employment,” Banxico said in a statement.

Annual inflation in Mexico slowed to 2.15% in April from 3.25% a month earlier, reaching the lowest rate since 2015 and going below the central bank’s 3.0% target rate.

Banxico noted that short-term expectations for headline inflation have decreased, adding that in the medium to long term they were fairly stable, and above 3.0%.

Capital Economics said it expected Banxico to trim the policy rate to 4.50% over the next six months, saying the board would proceed cautiously and probably move in steps of 50 basis points reductions or even scale it back to 25-point cuts.

“This was a bit more of a hawkish cut. ... We think that there is further scope for Banxico to trim interest rates without risking pressure on the peso and triggering capital outflows,” said Edward Glossop, economist at Capital Economics.

Some private analysts see Latin America’s second largest economy contracting by up to 10% or more this year.

Finance Minister Arturo Herrera suggested in a newspaper interview published earlier on Thursday that the central bank had room for cuts, with rates well above much of the world.

Banxico warned that challenges for monetary policy posed by the pandemic included both “the unprecedented impact on economic activity” and the financial turbulence it was causing.

The Mexican Social Security Institute (IMSS) on Tuesday reported that 555,247 formal jobs were lost in April due to the coronavirus crisis.

A major widening of the negative output gap and falling energy prices are the main downside risks to inflation, the bank said. Meanwhile, a larger and persistent depreciation of the peso and possible disruptions to supply chains and distribution of some goods and services constitute upside risks.

“In this context, the balance of risks for inflation remains uncertain,” Banxico said.

Reporting by Anthony Esposito; Additional reporting by Frank Jack Daniel, Dave Graham, David Alire Garcia and Richard Chang