18 | OCT | 2019
Mild recession coming: Banxico
Logo of the Bank of Mexico – Photo: Tomas Bravo/REUTERS

Mild recession coming: Banxico

12/07/2019
21:03
Newsroom & Agencies
Mexico City
Anthony Esposito, Stefanie Eschenbacher, Frank Jack Daniel, Rosalba O’Brien, Julia Love, Lizbeth Diaz & Chizu Nomiyama/REUTERS & Leonor Flores/EL UNIVERSAL
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Due to difficulties like an expensive USD, threats on tariffs, pressure on lowering the price of food and energetics, the increase of unemployment, and other factors, Banxico alerts of a possible mild recession

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There is risk of a possible, though mild, recession, alerted Banxico, according to the Minute 68 of the meeting of the Governing Board. They also alerted of a strong commercial tension, threats on tariffs, obstacles to investment that affect the trust in business; all of them are factors that will have serious consequences beyond financial volatility.

The majority of the Mexican central bank’s board members recommend maintaining a cautious monetary policy stance because of mixed inflation signals, minutes of its last meeting showed on Thursday, but two of the five members see signs lower rates could be justified.

Mexico’s central bank has held the benchmark rate at 8.25% since December. It has not cut rates since June 2014.

“The central bank must maintain a prudent and cautious policy stance and monitor closely all determinants of inflation,” the minutes said, emphasizing concern about stubbornly high core inflation.

Analysts increasingly see the Bank of Mexico (Banxico) inching toward a rate cut on the back of recent drops in headline inflation and soft economic growth. Although the board struck a cautious tone at the June 27th meeting, one member voted for a rate cut and another said that if inflation continues to soften, cuts would be needed relatively soon.

Four Banxico board members voted to hold the overnight interbank rate unchanged at 8.25% at the meeting, while recent appointment Gerardo Esquivel voted for a 25-basis-point cut.

Esquivel, who is close to the government of President Andrés Manuel López Obrador, has long called for more diverse views among the autonomous Banco de Mexico’s board members. In 2016, he raised the question of whether the bank should adopt a dual-mandate to promote growth as well as low inflation.

Another board member, who voted for a rate hold along with the majority, said “that if the behavior of inflation continues to be aligned with the convergence to its target, it will be necessary to begin a cycle of monetary policy easing in a relatively short horizon.”

The board member underscored that the decision to begin a cycle of rate cuts must be taken “very prudently and cautiously.”

Goldman Sachs’ head of Latin American research Alberto Ramos said in a note to clients that the first rate cut was likely to take place at the bank board’s September meeting, “but depending on the inflation-outlook friendless of incoming data and peso dynamics (does) not rule out an earlier cut at the August meeting.”

All five board members agreed the slowdown in Mexico’s economy had been greater than anticipated, with “signs of weakness” in the second quarter.

In this respect, President Andrés Manuel López Obrador said on his Friday morning conference that he sees no threat of a recession in the country, striking back amid mounting concerns about the health of the economy. López Obrador brushed aside economic concerns, saying the critics were speaking out “because it bothers them a lot that we have decided to end corruption.”
 

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