(Bloomberg) -- Mexico’s central bank was divided in its decision to keep the key interest rate at a decade high on Thursday, with one board member voting for a quarter-point cut.
The board held the benchmark rate at 8.25%, as forecast by all 23 economists surveyed by Bloomberg, with the combination of Donald Trump’s tariff threat and inflation at the upper limit of the official target range outweighing a sputtering economy. The statement didn’t say which of the five members voted for the reduction, though analysts speculated that it was Gerardo Esquivel, who has dissented from the board’s recent restrictive tone in communications.
While there’s a consensus building that the U.S. will join central banks from Chile to Australia and cut rates next month amid prospects of slower global growth, analysts expect no change from Banco de Mexico through year-end.
The outlook was reinforced this month when deputy Governor Jonathan Heath, appointed last year by President Andres Manuel Lopez Obrador, said Mexico shouldn’t cut rates while Trump’s threats persist. The U.S. president’s surprise late-May demand that Mexico do more to stop undocumented migrants or face 5% duties on its goods sent the peso to a six-month low.
“It’s a central bank that still wants to be conservative,” Alberto Ramos, the chief Latin America economist at Goldman Sachs Group Inc (NYSE:GS)., said before Thursday’s decision. “They see a number of risks still in front of them.”
Bloomberg Economics: External Headwinds, Questionable Policies Hurt Mexico
Annual inflation hasn’t been significantly below the 4% upper limit of the central bank’s target range since the end of 2016. Core inflation, which excludes more volatile food and energy prices, was 3.87% in the first half of June, near the highest since March 2018.
Despite an agreement on migration that avoided the tariffs, Mexico needs to consider them as an "almost permanent threat," Heath said in an interview with Bloomberg this month. This danger "is a permanent possibility as long as Trump is in power," he said.
Inflation expectations remain above Banco de Mexico’s objective. The 10-year breakeven rate, a bond market proxy for cost of living prospects during the next decade, is 4.17%.
Credit Outlook, Growth
Other looming risks include the possibility that more ratings agencies downgrade state-owned oil company Petroleos Mexicanos, known as Pemex, and possibly Mexico itself, after cuts to both by Fitch Ratings this month. Moody’s Investors Service also shifted its outlook on Mexico’s rating to negative.
Analysts expect Mexico’s gross domestic product to increase 1.2% this year, based on the median forecast in a Bloomberg survey. Barclays (LON:BARC) Plc sees growth of just 0.5% in 2019, the least since the 2009 financial crisis, and expects the central bank to hold rates this year and next, said Marco Oviedo, its chief Latin America economist.
"If the slack in the economy is becoming larger, inflation is coming down, the peso is getting stronger, then Banxico will definitely cut," Oviedo said in an interview before Thursday’s decision. "Given that those conditions are not there yet, I don’t see why the board should rush to cut at this point."
