Mexico was always borrowing costs while the debt at the Country’s state oil company kept threatening to destabilize confidence in the State’s finances even when the consensus foresees inflation moderating.
Governor Alejandro Diaz de Leon, who leads the central bank is a useful reference, retained the benchmark at an 8.25% rate, which is in line according to the 26 economists in the Bloomberg survey.
Last month, analysts in the country had simultaneously forecast a hold. Lately, this week, the United States Federal Reserve reduced its projected interest-rate from two to zero.
This is Mexico’s first interest rate cut from 2014. The economists and investors keep pricing the reduction due to the slowing inflation, a dovish Fed, stronger currency, and predictions of weaker economic growth.
The central bank clearly stated that inflation risks continue when there is prevalent market uncertainty – a situation which translates to a hawkish state.
In his words, Marco Oviedo, a chief Latin America who is an economist working at Barclays Plc. Said “ More hawkish beyond neutral.” He further went ahead to state that “The effects associated with persistent core inflation to anticipated effects of inflation is also a concern.”
The main reason for maintaining steady rates is the fact that Petroleos Mexicanos, which is globally the most indebted oil company, can elicit a sovereign downgrade rating which can cause a spur among capital flights, peso weakness, and so much more by JP Morgan Chase & Co.
As per Banxico’s statement, it stated that the factors at risk that relate to the economy include credit rating, specifically regarding Pemex and sovereign rating, which have caused several discounts on Mexico’s assets.
Gabriel Lozano, who is JP Morgan Mexico’s senior economist, says that the central bank of Mexico should anchor inflation expectations as soon as now.
Lozano does not feel the impact of the cut interest rate. Not until during the next year, the country’s labor unions increase wages proportionately with job actions as well as salary demands. These increases will cause inflation.
On the other hand, most economists predict that the rates will begin falling later in the year, around November. This is according to the Citibanamex survey and their median estimate. Economists also foresee a fall of inflation to 3.70% by the end of 2019. They predict the economy to grow by 1.5%, which will be a decrease from the 2.0% growth last year.
Confidence and Certainty
S&P Global Ratings reduced Mexico’s sovereign debt from stable to negative in early March. The reduction is attributed to the Country’s limitation on the private sector engagement in energy, a move which could significantly lower economic growth prospects.
President Andres Manuel has tried two Pemex rescues and neither had convinced the markets. There is a third attempt which will be presented in a fortnight and is probably including $7Billion to help the country pay its debts.
Banxico offered financial advice for the new government and said that “It is crucial to promote adoption of measures which help the environment grow its confidence and certainty. Growing these will promote investment, enhance productivity, and strengthened sustainability when it comes to public finances.”