By Anthony Harrup
MEXICO CITY--The Bank of Mexico's surprise decision to cut interest rates earlier this month came in a split decision, as several members of the board saw more risks than benefits to further lowering borrowing costs.
Three of the central bank's five voting members voted in favor of cutting the overnight interest rate target to 3% from 3.5% on June 6, minutes to the meeting showed Friday, while two voted to leave the rate unchanged.
The central bank, led by Gov. Agustín Carstens, said a majority of the five voting members agreed risks to economic growth had increased, and that the bank may have to reduce its growth forecast for the year, which it had already lowered to a range of 2.3% to 3.3%.
The central bank said there was agreement among most members that the slower growth--gross domestic product expanded an annualized 1.1% in the first quarter--would limit inflation, and that there would be a gradual improvement in economic activity in the second half of the year.
The interest rate cut came without warning from the central bank, surprising both analysts and investors. Some said it was the right decision, but questioned why the bank waited so long to act as the economy had been struggling for some time. Others wondered what the central bank was seeing that they weren't.
In arguing for the rate cut, three members said inflation had behaved better than expected, particularly considering the impact from this year's tax increases, and that, under current economic conditions, lower interest rates wouldn't keep inflation from reaching the bank's 3% target by early 2015. Mexico's annual inflation was 3.5% at the end of May.
They also noted thatexpectations for the U.S. Federal Reserve to start raising interest rates had been moved further into the future, and several members said the market was already pricing in the possibility of lower rates since yields on short-term Mexican Treasury bills were below the central bank's policy rate.
Opponents of the rate cut were concerned that renewed bouts of volatility in financial markets could have an impact on inflation by weakening the peso, and said the economy was likely to be recovering by the time any rate cuts had a positive effect on growth. Others countered that pass-through from a weaker currency to inflation is low, and more so when the economy is weak.
The Mexican peso has weakened since the rate cut, and has traded for much of this month at more than 13 to the U.S. dollar.
Another board member was concerned about real interest rates remaining negative for an extended period, with short-term yields currently belowinflation, saying it could discourage saving and encourage the taking of excessive risks.
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(END) Dow Jones Newswires
June 20, 2014 11:47 ET (15:47 GMT)
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