Bloomberg News

Credit Suisse Rate Flip-Flop Bolsters Cut Calls: Mexico Credit

September 12, 2011

Sept. 12 (Bloomberg) -- Mexico’s faltering expansion is prompting economists to join traders in predicting the central bank will lower interest rates.

Five of 21 economists forecast policy makers will reduce benchmark borrowing costs as soon as October, according to a survey by Citigroup Inc.’s Banamex unit on Sept. 6. All projected the central bank would keep rates at a record-low 4.5 percent through year-end two weeks before. Swaps traders began predicting on Sept. 2 that bank will trim rates next month. In Brazil, they are pricing in further reductions after a surprise 50-basis point cut in August.

Growing concern the U.S. and Europe may fall into recession is boosting speculation developing countries will follow Brazil and Turkey in lowering rates to shore up growth. Alonso Cervera, an economist at Credit Suisse Group AG, flipped his Mexico rate estimate two days after the publication of Banamex’s survey.

“It’s a combination of the worsening of the growth outlook from the U.S. and Mexico,” Cervera, who forecasts the central bank will trim its key rate in October and then again in December, said in a telephone interview from New York.

Yields on futures contracts due in October, known as TIIE, sank 10 basis points, or 0.1 percentage point, in the past month. Banco de Mexico is the only major Latin America central bank to have kept borrowing costs unchanged in the past year.

Yields on Mexico’s benchmark peso bonds due in 2024 fell 46 basis points last month, the biggest drop since March 2009. They rose 23 basis points to 6.58 percent today, according to data compiled by Bloomberg.

Recession Risk

Turkey unexpectedly cut interest rates to a record low of 5.75 percent on Aug. 4. Traders in Brazil expect the central bank will reduce its rate by 1 percentage point to 11 percent by year-end.

The chance the U.S. economy, which buys 80 percent of Mexico’s exports, may relapse into recession has risen to 35 percent, according to the median forecasts of 63 economists surveyed this month by Bloomberg News. The world’s biggest economy will expand at a 1.6 percent rate in 2011, the survey found.

“We’re closely tied to the U.S. cycle and a deteriorating U.S. economy would merit a more defensive position,” Eduardo Avila, an economist at Monex Casa de Bolsa SA in Mexico City, said in a telephone interview. “There’s room to have rates a little lower.”

One economist in the Banamex survey currently forecasts an October cut, while two expect a rate reduction in December and one predicts February. Avila, who forecast a cut without listing a date, plans to elaborate in a report next week.


Mexico’s economy will probably grow 4 percent this year, central bank Governor Agustin Carstens said in an interview with Mexico City-based Radio Formula on Sept. 8. It will expand “a little less” than 4 percent next year, he said.

A growth rate of 4 percent is still high enough to keep Carstens from lowering rates, said Nader Nazmi, a Latin America economist at BNP Paribas.

“If Governor Carstens believes that that the economy is going to grow at that pace, it would be difficult in my view to make the case for a rate cut,” Nazmi said in a telephone interview from New York. “If growth slows down substantially as a consequence of the U.S. outlook, then they’re ready to act. We haven’t gotten there yet.”

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries was little changed at 226 as of 5:15 p.m. New York time, according to JPMorgan’s EMBI Global index.

Default Swaps

The peso fell 1.2 percent to 12.8429 per U.S. dollar.

The cost to protect Mexican debt against non-payment for five years rose six basis points to 173 today, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Credit Suisse’s Cervera said slowing inflation and the prospect of stimulus measures from the Federal Reserve also led him to change his call.

Annual inflation slowed to 3.42 percent in August from 3.55 percent in July.

Fed Chairman Ben S. Bernanke, in a Sept. 8 speech to economists in Minneapolis, said policy makers will consider steps this month to bolster growth and employment. The Fed has measures at hand and is “prepared to employ these tools as appropriate,” he said.

‘Enough Firepower’

Bernanke has previously said that possible steps include buying more bonds and lengthening the duration of securities in its $1.65 trillion Treasury portfolio. The Fed purchased $2.3 trillion of debt since 2008, a policy known as quantitative easing, or QE. The Fed said on Aug. 9 that it will keep interest rates between zero and 0.25 percent through mid-2013.

“The central bank has enough firepower to do something,” Mauro Roca, an emerging-market strategist at Deutsche Bank AG, said in a telephone interview from New York. “The decision in Mexico is easier than the U.S. because they still have room to use their main policy: the interest rate. If other central banks are already cutting, that makes it easier for the remaining ones.”

--Editors: Lester Pimentel, Jonathan Roeder

To contact the reporters on this story: Jonathan J. Levin in Mexico City at

To contact the editor responsible for this story: David Papadopoulos at

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