(Adds policymakers’ views in minutes, economist comment and market reaction)
MEXICO CITY, June 20 (Reuters) - Mexico’s central bank split over the decision to cut interest rates earlier this month, but the majority said slack in the economy and the prospect of moderating inflation gave it room to lower borrowing costs, minutes showed on Friday.
Central bank board members voted 3-2 when it cut its benchmark interest rate by 50 basis points to a record low of 3.00 percent on June 6, surprising all 21 analysts polled by Reuters.
Latin America’s No. 2 economy barely grew in the first quarter as a harsh winter dragged on growth in the United States, Mexico’s top trading partner, while Mexican tax hikes hit domestic demand.
The majority noted that growth had been weaker-than-expected in the first quarter and some members said that slack could remain in the economy until 2016.
“Given the described economic conditions, convergence to the 3 percent target can be achieved in an efficient manner with a lower interest rate,” the minutes said.
The majority wanted to communicate that they did not plan to further lower borrowing costs.
“That’s a strong message and I think it will put an end to speculation that there could be further cuts,” said Alonso Cervera, an economist at Credit Suisse.
Yields on Mexican interest rate swaps were little changed after the minutes. The market is not projecting any further cuts and is betting on a hike by mid-2015.
The central bank cut its forecast for growth in May to between 2.3 to 3.3 percent from 3 to 4 percent, but a majority thought they would need to further trim the outlook after seeing more recent data, the minutes showed.
The country’s central bank had not been expected to lower its benchmark rate so far below the current inflation rate, which was 3.51 percent in the 12-month period though May.
A majority of board members said inflation expectations for 2014 had eased back after the tax hikes were seen having only a limited impact on consumer prices and most members said they see inflation converging to the bank’s 3 percent goal in early 2015.
Some board members disagreed, saying the risks leaned toward faster-than-expected inflation that could be fanned higher if the peso is hit again by global volatility.
The peso has whipsawed since last year on concerns that higher interest rates in the United States could draw back a tide of investment that flooded into emerging markets in recent years, seeking higher yields.
But the majority of Mexico’s central bank board said that the market has pushed back expectations for a U.S. Federal Reserve interest hike, which justified lower domestic interest rates.
The peso has slumped more than 1 percent from a six-month high hit just before the cut on June 6.
One board member was worried that the cut could undermine the bank’s credibility, since policymakers had said in October that they would not further lower interest rates. The central bank cut its rate three times last year and twice said it was done lowering borrowing costs.
However, the majority of the board said it had been clear in its previous statement that it was paying attention to slack in the economy in case it needed to act. (Reporting by Alexandra Alper and Michael O‘Boyle, Editing by W Simon)