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Mexican Peso Demonstrates Good Performance Despite Interest Rate Cut by Banxico

December 20, 2019 at 22:38 by Vladimir Vyun

USD and MXP one hundred billsFriday’s performance of the Mexican peso was rather good considering that Mexico’s central bank decided to cut interest rates. The currency was about flat versus the US dollar and even managed to gain on the extremely weak euro. The good performance could be explained by the fact that the bank refrained from a deeper cut and its policy statement sounded less dovish than expected.

The Bank of Mexico announced a cut of its key interest rate by 25 basis points to 7.25% today, while one of the board members called for a deeper cut to 7%. The statement revealed that policymakers were worried about the economy:

The current environment continues to pose risks that could affect the country’s macroeconomic conditions, its ability to grow, and the economy’s price formation process.

The bank added further:

Although available information for the fourth quarter of 2019 is limited, the weakness that economic activity has been exhibiting for several quarters is expected to persist. This implies that negative slack conditions have widened with respect to those observed in the previous quarter. The growth outlook is in line with the one published in Banco de México’s Quarterly Report July-September 2019. In an environment of significant uncertainty, the balance of risks for growth remains biased to the downside.

The inflation outlook did not look good either:

For 2020, core and headline inflation will reflect both the greater amount of slack in the economy and the cost-related pressures resulting from the recent minimum wage revisions, which could locate them moderately above the levels anticipated in the last quarterly report.

As a result, the central bank concluded:

Considering the lower levels registered by headline inflation, its outlook within the time frame in which monetary policy operates, the more ample slack in the economy, as well as the recent behavior of external and domestic yield curves, Banco de México’s Governing Board decided by majority to lower the target for the overnight interbank interest rate by 25 basis points to 7.25%. One member voted for lowering the target to 7.00%.

But while the statement sounded undoubtedly dovish, analysts pointed out the fact that only one member voted for a deeper cut versus two in November. That signals that the Bank of Mexico plans a gradual easing cycle, avoiding sharp rate cuts. The deal on the revised United States–Mexico–Canada Agreement (USMCA) undoubtedly bolstered the confidence of Mexican rate-setters. Indeed, the statement said:

Although domestic financial markets in Mexico underwent episodes of volatility associated with social developments in certain Latin American countries, financial assets in Mexico and the peso exchange rate have recently exhibited positive results. The agreement to approve the USMCA together with the monetary policy stance have contributed to such results.

USD/MXN closed at 18.9266 today, near the opening level of 18.9166. EUR/MXN dropped from 21.7738 to 21.7157 after rising to the high of 21.8565 earlier.

If you have any questions, comments, or opinions regarding the Mexican Peso, feel free to post them using the commentary form below.

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