June 27, 2019 / 6:47 PM / 3 months ago

UPDATE 2-Mexico central bank holds rates steady but board splits

(Adds details from statement)

By Dave Graham

MEXICO CITY, June 27 (Reuters) - Mexico’s central bank held its benchmark interest rate steady on Thursday, as expected, although as worries over the economy grew, the board was not united in its decision for the first time since two new members joined at the start of 2019.

In a statement, the Bank of Mexico (Banxico) said one member had voted to lower borrowing costs by 25 basis points, while the remainder of the five-strong board opted to hold the overnight interbank rate unchanged at 8.25%.

The split decision hinted the new government was starting to leave a mark on monetary policy, after Carlos Urzua, now finance minister, expressed a desire for new “blood” at the bank during last year’s presidential election campaign, which leftist Andres Manuel Lopez Obrador won by a landslide.

All 16 analysts and economists surveyed in a Reuters poll had forecast that Banxico would keep its key lending rate at 8.25%, the level it has been at since Dec. 20.

The bank said some inflationary risks had increased and some had diminished since its last monetary policy meeting on May 16, and it struck a downbeat note on the outlook for the economy.

“The balance of risks for growth has become more uncertain and the downward bias has increased,” the bank said.

Some analysts saw the latest monetary policy decision as evidence the bank was getting closer to cutting interest rates, which are at their highest since 2008.

“We wouldn’t (overplay) this but, combined with a less hawkish accompanying statement, it does suggest that Banxico is inching closer to easing,” analysts at Capital Economics wrote in a note, noting that investors’ expectations for monetary easing over the next 12-18 months had risen “dramatically”.

“That comes on the back of weaker-than-expected growth so far this year, but also expectations for larger U.S. rate cuts.”

Other analysts were more skeptical.

The bank did not say which board member had voted against holding rates steady, though minutes from the last monetary policy meeting offered a potential clue.

During that session, one new board member, Gerardo Esquivel, dissented on the tone of the policy statement, calling it too hawkish and worrying that the bank’s language was fueling higher inflation expectations, the minutes showed.

Esquivel, who had been tapped as deputy finance minister in the Lopez Obrador administration before moving to the bank at short notice, voted to hold rates steady in May.

He and Jonathan Heath, a well-known private economist who was previously chief economist for HSBC bank in Mexico, were ratified to serve on the bank’s board in January.

Alfredo Coutino, an economist at Moody’s Analytics, said even though inflation eased to 4.0% in the first half of June, core inflation was rising and conditions did not look favorable for the bank to be cutting rates soon.

“The central bank should not be in a hurry to lower rates because it doesn’t have enough justification to do so,” Coutino wrote in a research note. (Reporting by Dave Graham; additional reporting by Frank Jack Daniel; editing by Lisa Shumaker and James Dalgleish)

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