October 1, 2019 / 7:58 PM / 2 months ago

Mexico's central bank has room to cut rates; How low will it go?

MEXICO CITY, Oct 1 (Reuters) - Faced with weak economic growth and cooling inflation, Mexico’s central bank has all the tools to keep cutting rates in 2020. The question now is how far the bank will go, analysts say.

While some say the bank will trim its key interest rate by 75 basis points over the course of the next year, others are betting on a total reduction of up to 200 basis points.

Last Thursday, the bank, known as Banxico, slashed its key interest rate by 25 basis points to 7.75%, its second straight reduction.

Many analysts say the bank has much more room to cut. According to the boldest predictions, the cost of obtaining money in Mexico could fall to 5.5% over the next 15 months, a level not seen since 2016.

“We expect the core inflation to decrease over the rest of the year, giving enough space for Banxico to reduce its rate,” Sergio Luna, an economist at Citibanamex, wrote in a note to investors.

Inflation cooled to 2.99% in the first half of September, dipping below Banxico’s target of 3% for the first time in three years.

But the Mexican economy barely escaped a recession during the first half of the year, and the country’s gross domestic product is expected to grow at its slowest pace in a decade, supporting calls for the central bank to act more boldly.

In addition to inflation and economic growth, Banxico will also likely be influenced by the U.S. Federal Reserve as it considers its next steps, analysts say.

“Our Banxico view is... partly reliant on our Fed call of one more 25-basis point cut this year and a further 150 basis points of cuts in 2020,” said Christian Lawrence, senior strategist at Rabobank.

Mexico’s base interest rate is the third-highest in the Group of 20 major economies, trailing only Argentina and Turkey. That gives Banxico plenty of room to reduce the rate without diminishing the appeal of Mexican debt, analysts say. (Reporting by Abraham Gonzalez; writing by Julia Love; Editing by Dan Grebler)

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