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Mexico to cut rates after FOMC: analysts

Sep 20, 2013

The Bank of Mexico’s interest rate cut earlier this month is likely the beginning of an easing cycle, analysts say after Wednesday’s US Federal Open Markets Committee meeting


The US Federal Reserve's decision to continue quantitative easing at its current pace makes it more likely that the Bank of Mexico will cut rates at its next meeting, market analysts say.

Banxico surprised markets by cutting interest rates by 25 basis points at its meeting earlier this month. Rates in Mexico are at a historic low of 3.75%.

The chance of another rate cut at the October meeting "rose meaningfully" after another market surprise - the Fed's decision on Wednesday not to taper its $85 billion monthly QE program - Alberto Ramos, head of Latin America economics at Goldman Sachs, said in a note published Friday.

"We believe the domestic growth-inflation balance of risks supports another 25 basis point rate cut at the October 25 meeting, but we also acknowledge that global drivers and their potential impact on the Mexican peso and capital flows adds an extra layer of complexity and hawkish considerations to the decision on the optimal current monetary policy stance."

Minutes of Banxico's September meeting showed that two of the five directors did not support the rate cut. One opposed the decision on the grounds that it was better to assess the market reaction after the Fed's meeting.

"The post FOMC rally in emerging markets assets and the appreciation of the peso to the USD should have eased significantly the concerns of the dovish dissenting director that saw merit in cutting but wanted to wait to observe the market reaction to the FOMC meeting, and must also have dispelled some of the fears and concerns of the most hawkish dissenting director," said Ramos.

Analysts at Barclays took a similar view.

"After this decision was made, the very dovish statement allowed us to believe that this could be the beginning of an easing cycle and that another rate cut will be implemented in October 25," said Barclays analysts in a note released on Friday. "The minutes support this view."

Bank of Mexico governor Agustín Carstens told LatinFinance ahead of the rate cut that the country's strong fundamentals would help it withstand volatility in global markets.

Markets ignite

Elsewhere, the surprise move from the US Federal Reserve has jolted Latin America's capital markets into action.

Colombia issued Thursday a new benchmark bond, its first since a $1.6 billion sale in January. Brazilian development bank BNDES also joined in with a $2.5 billion deal including three and 10-year tranches. Both were increased in size from initial expectations. Pemex sold both global peso and dollar-denominated bonds.

The US dollar and bond yields dropped, while Latin markets soared on the news. Stock indices and currencies jumped across the region, where asset prices have suffered since May when the Fed first hinted at ending QE earlier.

US growth numbers were not strong enough for the Fed to begin unwinding the stimulus. And now, many don't see the developed markets able to exit stimulus for some time.

Central banks, including the US Federal Reserve, will be hard pressed to tighten policy in the near term, Pimco CEO Mohamed El Erian toldLatinFinance.

Analysts expect emerging markets will be buoyed by the news at least until next month's Federal Open Markets Committee meeting, when the central bank will again consider tapering its bond buying program. LF



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