Mexico’s central bank is prepared to act ahead of schedule

“Mexico’s central bank is prepared to act outside of its normal decision calendar again if needed”, Governor Alejandro Diaz de Leon said after the institution announced its first unscheduled interest rate decision in four years amid plunging economic forecasts.

The calendar of set meetings was designed with a calmer time in mind, and extraordinary rate decisions by the Federal Reserve made it necessary for the Mexican central bank — better known as Banxico — to act ahead of its schedule, the governor said in an interview.

The bank reduced rates in an unannounced meeting on Friday following a deterioration in the country’s economic outlook and a collapse of the peso, which lost almost 23% in just a month. Economists this week rushed to reduce Mexico’s gross domestic product forecast for this year amid growing risks of a global recession triggered by the coronavirus pandemic.

Scotiabank’s analysts expect Mexico to contract 5.8% this year, an activity slump not seen in Latin America’s second-largest economy since the Tequila Crisis in the mid-90s.

“We are ready to make decisions that are needed when they are needed,” said Diaz de Leon. “The calendars are there and they have their logic, and if needed we can act — as we did today — on a different day.”

MEXICO REACT: Surprise Rate Cut Boosts Expectations for More

While the central bank’s meeting had previously been scheduled for March 26, Banxico brought the decision forward after a spate of rate cuts across developing markets including Brazil, South Africa and Peru. The moves were precipitated by the Federal Reserve, which on Sunday slashed its benchmark rate a full percentage point to near zero and promised to boost bond holdings by at least $700 billion.

Banxico’s decision was the first such unscheduled move since early 2016, when the bank raised rates to support the peso following an oil price plunge.

More Measures

Banxico on Friday announced additional measures aimed at boosting liquidity including reducing banks’ deposit requirements at the central bank and offering dollar auctions that will be financed by a swap line with the Fed. The governor said in the interview that further measures along these lines are also available if the conditions require.

Friday’s decision to cut borrowing costs by 50 basis points to 6.5% still keeps Mexico among the world’s highest real rates, or adjusted by inflation. Diaz de Leon added that if economic conditions worsen, Banxico has space to act because of that rate buffer. However, if other risks such as a potential rebound of inflation loom larger, they will continue to evaluate the situation.

The governor added that in Mexico’s complex environment, fiscal decisions should be taken with caution and that he would respect any decisions made by the Finance Ministry.

“There are other economies with other conditions that also allow for a different level of freedom,” he said. “We must take decisions that can maintain a solid macroeconomic position.”

While the rapid spread of the coronavirus has taken markets by surprise, Diaz de Leon said that the central bank has detected only one case of the disease in the institution and is working to diminish the risk to employees.

He added that the latest decision was made virtually, without Banxico’s board members in the same room.

Source: bloomberg.com

The Mazatlan Post