MEXICO CITY: Mexico's central bank cut interest rates on Friday for the first time in nearly four years, taking borrowing costs to a new record low as policymakers bet they are winning the battle against inflation in Latin America's second-largest economy.
The Banco de Mexico cut benchmark borrowing costs by 50 basis points to 4.0 percent, a move predicted by only five of 21 analysts polled by Reuters last week.
Although policymakers had said at their last meeting that looser policy was possible if both slower growth and inflation continued, most had not expected the central bank to act so quickly.
The move surprised markets and most analysts who have watched the central bank hold its key rate steady since mid-2009 and back away from previous signals that it might tweak borrowing costs in either direction.
"This change recognizes the success in the medium term in bringing down inflation and will help the economy adjust to a scenario of lower economic growth and inflation," the central bank said in a statement, noting that the cut was not the start of a cycle.
The statement made it clear the cut is a one-off move aimed at bringing Mexico into line with easy money policies in major economies.
It also reflects the central bank's view that inflation is on a steady downtrend toward its 3.0 percent target, after making a structural break from past years of price pressures.
Mexico peso whipsawed on the decision briefly is weakening before surging to a session high.
Analysts said the fact that the cut was seen as a one-time event should not erode support for the currency.
Yields on short-term interest rate swaps fell after the decision as many had not tipped a cut so soon, while bond yields rose as investors who had been betting on a cut took profits.
"This was not completely priced in. It is a good move by the central bank, it is a recognition by the central bank that is has been successful on inflation," said Alonso Cervera, an economist at Credit Suisse in Mexico City.
Policymakers shrugged off a quickening in the inflation rate to 3.55 percent in February and said slow growth and continued slack in the labor market would help keep prices in check.
The central bank said inflation is expected to tick up further in coming months to 4 percent before falling back to around 3 percent by the second half of the year. It is then seen holding around that level next year.
The decision was also a response to foreign investment inflows, which have poured into Mexico due to its relatively high interest rates.
Those flows could strengthen the peso and effectively tighten monetary policy in Mexico, whether the central bank wants it or not.
The Banco de Mexico famously has a hands-off approach to the peso currency and markets, unlike many of its emerging market peers.
But it is still concerned about stock and bond inflows which totaled $80 billion last year, and hopes that a lower rate of return will give investors pause.
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