Good news for the Mexican government.
Forget worries slowing growth or the impact of the US shutdown and fears of a debt ceiling Armageddon. Mexico is finding it cheaper and cheaper to borrow.
According to Bloomberg:
Mexico is paying the lowest rate to borrow short-term debt since it began holding auctions in 1982 as a deepening economic slowdown fuels speculation the central bank will cut benchmark borrowing costs.
Yields on Cetes, as the 28-day government securities are known, fell 0.04 percentage point to 3.4 percent at [Tuesday's] auction.
The result reflects the growing expectations that the Mexican Central Bank would cut benchmark interest rates in the months ahead.
Healthier-than-expected inflation data out on Wednesday – September headline inflation was 0.38 per cent and core inflation was 0.32 per cent, below the market consensus for 0.44 per cent and 0.35 per cent respectively) – has fuelled the view that, as UBS economist Rafael de la Fuente put it:
Barring a disastrous fiscal outcome in the US over coming days, Banxico will deliver another 25bp interest rate cut at its Oct 25 meeting.
Marco Oviedo at Barclays went further in a research note, saying:
We now expect an additional rate cut in December 6. High frequency indicators of September suggest that the economy remains weak and the downside risks to growth continue: September PMIs improved but remain below 50, car production declined 5.2% m/m seasonally adjusted with a strong reduction in domestic car sales (8.2% m/m sa) and the hurricanes that occurred that month will have a negative effect on services and primary activities.
Moreover, the continuation of the US government shutdown poses risks to economic activity in that country and the Mexican economy is the most exposed. In this context, we are expecting a 25bp cut at the October 25 Banxico monetary policy meeting, along with a very dovish statement that would imply an additional 25bp rate cut at the December 6 meeting. All in, we now expect a reduction of 50bp in the reference rate to reach 3.25% at the end of the year from 3.75% currently.
So even if all is not rosy on the economic front, this all seems to bode well for cheaper debt auctions in future. Mexico’s indebted state governments will be watching with envy.
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