Mexico cenbank dims GDP forecast on mounting risks

Mexico's central bank cut its 2019 growth forecast to a range of 1.1%-2.1% from its December estimate of 1.7%-2.7% in response to mounting global and domestic uncertainty.

The bank, in its quarterly inflation report presented Wednesday, also made a more modest adjustment to its 2020 forecast to 1.7%-2.7% from 2.0%-3.0%.

And while the bank did make marginal modifications to its short-term inflation outlook, integrating recent softening of agricultural prices, it held unchanged its 3.4% estimate for year-end annual inflation and called for annual CPI to reach its mid-target rate of 3.0% by 3Q20.

Mexico's benchmark rate, now at 8.25%, is at its highest level in a decade, and the central bank's emphatic 60bp reduction in the 2019 GDP forecast led analysts to suggest a shift in monetary policy.

In a research note, local lender Banorte compared the rhetoric on inflation the report to previous statements and saw no meaningful changes in the central bank's outlook with the balance of risks to inflation still "tilted to the upside in a highly uncertain environment."

"All in all, we believe that the reduction in growth estimates, along with our expectation of an inflation forecast below the central bank's expectations, and a solid macroeconomic framework are more than enough to anticipate the start of an easing cycle in the reference rate as soon as June," read the Banorte analysis.

"Banxico will look for a window to cut rates," said Citibanamex in a post-report analysis, with the weight of any decision resting on three main concerns: whether or not current inflationary risks materialize, "especially those related to the behavior of the peso and recent increases to the minimum wage"; the scope and depth of the current economic deceleration; and the actions and rhetoric of the US Federal Reserve.

Mounting risks to growth

The central bank added in the report that despite its reduced forecast the persistence of multiple risk factors - both external and domestic - would suggest that the balance continues to be tilted downward.

On the external front, the bank noted, "The indicators of manufacturing activity, international trade and business confidence confirm the prospect of a deeper weakening of the global economy to what was anticipated."

The bank said that, in addition to an unexpected weakening in domestic demand at the end of 2018, a number of transitory shocks at the start of 2019 looked to impact GDP growth this year, including fuel shortages, striking textile workers and railway blockades.

The bank also raised the issue of Fitch's recent credit rating downgrade of state-run oil giant Pemex and its potential impact for the government.

The revised rating, stated the report, "will imply higher financing costs for this company and warns of the risks that it faces, underscoring its importance to the country's economy and, in particular, for its public finances."