Mexico rates set for long pause, say analysts

Mexico rates set for long pause, say analysts

 Augustín Carstens, Governor of the Bank of Mexico
Source: Banco de México
Rates in Mexico are likely to stay at their historic low of 3% for some time, analysts said after Banxico left the benchmark unchanged last week.

The decision to hold followed a surprise 50bp cut in June. The next move could be a rate hike next year, analysts said.

“The bar for additional cuts remains very high,” said Goldman Sachs analysts after the decision. The investment bank expects GDP growth to pick up, leading to a potential rate hike — but not sooner than late in the first half of 2015.

Capital Economics analysts forecast the rate to sit at 3% for at least a year. The firm also expects economic activity to pick up. Given “large amounts of spare capacity” in the economy, an acceleration of growth would not push inflation higher, the firm said.

Mexico’s inflation rose to 3.7% last month, and growth has averaged 1.6% on an annualized basis in the first four months of 2014, said Capital Economics.

The hold follows a decision by Peru’s central bank to cut rates for the first time since November, departing from a policy of holding rates while lowering banks’ cash reserve requirement. The bank cut the base rate to 3.75% from 4% on Thursday, noting continued weaker than expected growth.

The cut was consistent with forecast inflation converging to the target range and towards 2% in 2015, BCRP said. But it cautioned that the move did not necessarily indicate the start of an easing cycle.

Chile’s central bank is next in the region to decide on interest rates, at its policy meeting on July 15. LF