MEXICO CITY: Mexico’s central bank cut its growth outlook for this year, putting pressure on the bank to keep interest rates low as long as possible despite a weak peso.
In its quarterly inflation report, the Bank of Mexico slashed its growth estimate to between 1.7% and 2.5% from the previous range of 2% to 3%.
If the estimate proves right, it would be a hard blow for President Enrique Peña Nieto. The midpoint of the latest estimate—2.1% growth—means Latin America’s second-largest economy would expand this year at the same pace as in 2014.
“A low pace of growth is prevailing,” Gov. Agustín Carstens said at the report’s presentation at the bank’s headquarters.
Economic growth in May, the most recent data available, was just 0.1% from April, with industrial production contracting and household consumption recovering marginally. Mexico likely grew 0.3% in the second quarter, slowing from the previous quarter, the central bank said.
Mexican policy makers have kept the overnight interest rate at a record-low 3% since 2014 in an effort to lower borrowing costs and support the sluggish economy.
Only a weak peso, pressured by anticipated interest-rate increases in the U.S., has prevented further easing, according to some economists. The Mexican currency hit an all-time low against the U.S. dollar in late July, prompting the central bank to step up interventions in the exchange market to stem the peso’s rout.
The central bank is widely expected to start raising interest rates in September if the U.S. Federal Reserve does, to stop the depreciation of the peso and avoid a rise in inflation expectations.
A slow economy has helped inflation to stay under control. The bank expects inflation to remain below the 3% target this year and hover around 3% in 2016. In July, 12-month consumer price inflation stood at 2.74%, the lowest level in 45 years.
“The situation of the economy doesn’t require higher interest rates right now,” said Mr. Carstens. Although the bank could act anytime if necessary, he made it clear the bank prefers at this stage to use dollar auctions to support the peso without affecting economic growth.
Falling oil prices and a 10% decline in oil production in the past year have weighed on Mexico’s growth and hurt business confidence. The government announced $8.3 billion in spending cuts earlier this year and is preparing deeper cuts when it submits the 2016 budget plan to Congress in September.
Mr. Carstens urged the government to continue efforts to stabilize the country’s ratio of public debt to GDP, since higher interest rates expected in the coming months will make government financing more expensive. “It would be important [to have] an additional effort in fiscal tightening,” he said.
Since President Peña Nieto took office in December 2012 with a 5% growth target and a series of economic changes, economic growth has averaged just 1.8%. Meanwhile, public debt increased to 44% of GDP in 2014 from 36% in 2012.
The opening of the oil sector to private investors and new antitrust legislation to increase competition in the telecoms market, two anchors of Mr. Peña Nieto’s agenda, appear to have had little effect on economic growth thus far.
“We hope they will begin to have more positive effects soon,” said Mr. Carstens.
Downward growth revisions among both private and government economists have been the norm in recent years.
For 2015, the government initially expected 3.7% growth, and its current estimate is that the economy will expand between 2.2% and 3.2%. Finance Minister Luis Videgaray has attributed the disappointing results in part to a global slowdown and a worse-than-expected U.S. recovery.
