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The majority of Mexico’s central bank board said monetary policy needs gradual adjustment, while policy makers appointed by President Andres Manuel Lopez Obrador again voted for steeper interest-rate cuts.
Governor Alejandro Diaz de Leon and deputy governors Javier Guzman and Irene Espinosa voted for a quarter-point reduction in borrowing costs to 7.5% on Nov. 14 after inflation and growth slowed, according to minutes released on Thursday. Deputies Gerardo Esquivel and Jonathan Heath voted for a steeper, half-point cut for a second straight decision.
The minutes don’t state which of the five board members held certain opinions, beyond the dissenting views of Esquivel and Heath. But it’s likely that the same members who said they favored gradual easing were those who voted for the less aggressive cut, said Alonso Cervera, chief Latin America economist at Credit Suisse Group AG in Mexico City.
Most of the board mentioned the persistence of core inflation, which excludes more volatile food and energy prices, as a risk that could remain despite greater slack in the economy. Banco de Mexico has a priority mandate for targeting 3% inflation. Most economists expect the central bank to cut its policy rate by another quarter percentage point in its final decision of the year on Dec. 19.
“Unless we see a very swift drop in core inflation or a very fast strengthening in the peso, the rate cuts will continue being the same 25 basis points,” Cervera said. He said policy makers are likely to continue reducing rates next year, eventually stopping once they reach about 6%.
In voting for a larger cut, Esquivel argued that a quarter-point reduction was too little, too late. He cited inflation close to its target, slowing core prices, a general reduction in interest rates globally, a widening negative output gap and a reduction of risks. Mexico has the highest real interest rate, or borrowing costs minus inflation, among Group of 20 nations after Turkey.
Heath listed some of the same reasons for his vote, saying that the tightness of Mexico’s policy hasn’t been reduced relative to the rest of the world, given global easing.
While Lopez Obrador has repeatedly said that he respects the central bank’s autonomy, in July he said that he’d like policy makers to pay greater attention to growth. The bank on Wednesday cut its 2019 gross domestic product forecast to a range of -0.2% to 0.2%, from the previous 0.2% to 0.7%. Mexico’s economy hasn’t suffered an annual contraction since 2009.
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