Bank of Mexico Cuts Interest Rates as Economy Struggles

MEXICO CITY—The Bank of Mexico lowered interest rates Thursday for the first time in more than five years in a split vote, citing slowing economic growth, lower inflation and a decline in debt yields in Mexico and abroad.

The central bank said a majority of board members voted to cut the overnight interest-rate target by a quarter of a percentage point to 8%, while one member voted to keep the rate at 8.25%.

The bank noted the Mexican economy continued to stagnate in the second quarter of this year, creating even greater-than-expected slack in the economy. Gross domestic product contracted 0.2% in the first quarter from the previous quarter, and edged up just 0.1% in the second quarter, prompting economists to cut their growth estimates for all of 2019 to less than 1%.

“The balance of risks for growth remains biased to the downside,” the Bank of Mexico said.

Analysts were evenly divided over whether the central bank would raise rates Thursday, or prepare the market for a rate cut in September.

“It’s easy to look with hindsight and say, well, if we thought they were going to signal cutting, why not just cut?” said

Christian Lawrence,

a senior market strategist at Rabobank in New York.

The last time the bank cut interest rates was in June 2014. The bank embarked on a tightening cycle beginning in December 2015, and gradually raised the rate to 8.25% by December 2018 in response to rising inflation.

Inflation slowed to 3.8% in July from 4.8% at the end of last year, although most of the reduction has been in prices of noncore goods such as fresh produce and energy, which are less likely to react to changes in borrowing costs. Core inflation remained stubbornly high at 3.8% last month.

The central bank has an inflation target of 3%.

The Bank of Mexico noted that other central banks around the world have cut interest rates, including the Federal Reserve, and said that lower yields could support the Mexican peso. The peso strengthened in the wake of the decision and was trading around 19.60 to the U.S. dollar.

“Rate differentials are still wide, and even if rate differentials do narrow a little bit, the Mexican peso will still be the most attractive carry currency,” Mr. Lawrence said. “Despite all this global turmoil, there is still a demand for yield.”

The Bank of Mexico said risks remain for Mexican financial assets in trade relations with the U.S. and the credit rating outlook for state oil company Petróleos Mexicanos and the country’s sovereign debt.

It urged the government to address the deterioration of the credit ratings, meet this year’s budget targets, and adopt measures to generate certainty for investment including a 2020 budget that generates confidence.

Capital Economics’ Latin America economist

Edward Glossop

said he expects further rate cuts this year despite a cautious sounding statement from the central bank that was “probably designed to temper expectations of an aggressive easing cycle.”

The central bank didn’t specify that the move wasn’t the start of a cycle of rate cuts, as it had done in the past. “This is not just about a couple of doves who have managed to convince one of the hawks to deliver a one-off cut,” he said.

Write to Anthony Harrup at anthony.harrup@wsj.com

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