Mexico’s Guzman: Too early to signal possible rate cuts ahead

April 2, 2019

LONDON (Reuters) – Mexico’s central bank still needs to see clear proof of inflation pressures declining before considering a cut in interest rates, its deputy governor said on Tuesday.

Data showing a slowdown in annual inflation in March fanned expectations the central bank could start cutting rates this year from the current 8.25 percent – the highest since the financial crisis.

“The balance of risks for inflation continues to be to the upside,” Deputy Governor Javier Guzman told Reuters in an interview on the sidelines of a presentation in London.

“It would be very difficult nowadays to send a message that we can cut rates, we would still need to wait for clear evidence that inflation is declining to be able to send that message.”

Mexico’s annual inflation continued to slow in the first half of March, with consumer prices rising 3.95 percent in the year through February, a touch below the 3.99 percent increase in the second half of February.

Policy makers across many developing nations have started cutting interest rates in recent weeks thanks to easing inflationary pressures and with a rally in the dollar and global borrowing costs running out of steam.

Major central banks such as the U.S. Federal Reserve, the European Central Bank and the Bank of Japan have all pushed policy tightening plans to the backburner amid rising concerns over the health of the global economy.

Guzman said he expected some recovery of economic activity in the second quarter of 2019 despite fuel shortages, road blockades and strikes crimping growth.

In February, the bank lowered its growth forecast to between 1.1-2.1 percent for full-year 2019 and 1.7-2.7 percent for 2020.

“What we are anticipating is a declaration of economic activity this year and some recovery in 2020,” Guzman said, adding that U.S. President Donald Trump’s threat to shut the U.S.-Mexico border would hit Mexico’s economy.

Assessing the health of the U.S. economy, Guzman said it was not his base case that it would tip into recession, a fear fanned by a recent inversion in parts of the U.S. Treasury yield curve seen as a classic signal that the world’s top economy may head for a downturn.

“The possibility of a recession in the U.S. has increased, and you see that in a number of surveys, but it is still from a very low level,” he said.

Asked if he thought the U.S. Federal Reserve had made a mistake by raising interest rates, Guzman said he did not think so. However, he did question the way in which the central bank communicated a change in tack, bringing a three-year rate-hike cycle to an abrupt end and taking markets by surprise.

“They were acting on the basis of the information that they had available,” said Guzman. “Where you can have question marks regarding the Federal Reserve policy is the rapid shift that you saw in terms of communication.”

(Reporting by Karin Strohecker; Editing by Robin Pomeroy)

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