Tags: Mexico | Bernanke | Fed | stability

Mexican Policymakers Flag Global Volatility in Rate Minutes

Friday, 26 July 2013 02:05 PM

Mexican policymakers voted unanimously to keep rates on hold this month as the debate over stimulus policies in the U.S. fueled instability in global currency markets, minutes of the meeting showed.

The five-member board left the key rate at a record-low 4 percent as the economic outlook deteriorated and inflation risks eased, according to the minutes released today. Some members said they remain watchful for “external financial shocks.”

The inflation rate fell more than economists had forecast to 3.53 percent in the first half of July, dropping within the central bank’s target range of 2 percent to 4 percent. The minutes were less dovish than the central bank’s July 12 statement as board members raised concerns that future Fed actions could increase financial market volatility, said Marco Oviedo, the chief Mexico economist at Barclays Plc in Mexico City.

“They will remain on hold for the rest of the year,” Oviedo said in an e-mailed response to questions. “Banxico believes that the risks to financial stability have increased amid the temporary economic weakness of Mexico and the improved inflation outlook, supporting a neutral stance.”

Federal Reserve Chairman Ben S. Bernanke signaled in May that the U.S. could dial back stimulus, sending Mexico’s peso to a 10-month low against the dollar on June 20.

The currency slid 0.8 percent to 12.7057 per U.S. dollar at 10:45 a.m. in Mexico City, paring its rally in the past month to 3.6 percent. The currency has risen after Bernanke damped speculation that the withdrawal of stimulus will begin soon.

‘Most Important’

The possibility of the Fed easing its rate of bond purchases is “the most important change in the international environment,” according to the minutes.

The peso yesterday remained 5.3 percent below an almost two-year high reached in May. A weaker currency pushes up the prices of imports, which may pressure inflation.

“A stable peso is a necessary condition for a rate cut from Banxico in September or October,” Ociel Hernandez, the head of fixed income at Grupo Financiero BBVA Bancomer SA, said in an e-mailed research note on July 24. The bank forecasts a cut of a half percentage point, or 50 basis points, to 3.5 percent in September.

Decision Influences

Expectations for future rate moves have reversed over the past month as the peso strengthened and the inflation rate fell. Yields on six-month interest-rate swaps closed at 4.27 percent yesterday, indicating traders see about a 24 percent chance the bank will lower rates over that period. On June 21, swap contracts indicated about a 36 percent chance the bank would increase its benchmark rate within six months.

The board’s decision was influenced by “the recent development of inflation and its expectations, the significant slowdown in the Mexican economy, the fragility of the external environment and the volatility in international financial markets,” according to the minutes.

Banxico’s concern about growth and confidence inflation will slow “could be interpreted as a solid argument to engage in an outright dovish stance,” Gabriel Lozano, chief Mexico economist at JPMorgan Chase & Co. said in an e-mail today.

“However, the emphasis regarding the implications of the ’tapering’ are not negligible as they discussed the financial market implications, and the potential effect on inflation expectations from increased volatility.”

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Mexican policymakers voted unanimously to keep rates on hold this month as the debate over stimulus policies in the U.S. fueled instability in global currency markets, minutes of the meeting showed.
Friday, 26 July 2013 02:05 PM
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