According to Barclays Plc., different banks and traders including the Credit Suisse Group AG, who are predicting that the Mexican Central Bank will go for interest rate cuts, are kind of misreading the intentions of the Central Bank. The 1-year swap rates have gone down by 0.19% to 4.65% since 17th January. Incidentally, the policy makers of Mexico, on the very next day, stated that they may go for rate cut if the inflation continues to slow down further. If the 28-day interbank rate of the country is considered, the swap rate is still 0.19% less and this indicates that the traders see the possibility of a reduction in the borrowing costs. The renowned economist of Credit Suisse, Alonso Cervera, stated that the Central Bank of Mexico, in such a situation will go for rate cut of around 1% right in 2013. Since 2009, Central Bank of Mexico has been the lone central bank of the major countries which has kept the borrowing costs unchanged and also did not go for increasing the debt purchases.
However, Barclays thinks otherwise. According to the lender, Banco de Mexico is currently trying to cut the bond yields without lowering the rates down. This strategy incidentally is named as the Maradona Theory of Interest Rates and was first implemented by the Bank of England Governor Mervyn King, way back in 2005.
According to Barclays, Central Bank of Mexico is definitely going for the debt cost cut down strategy. The market is currently predicting that the Central Bank may go for rate cuts, but, Barclays’ economists reminded that in last 4 years, this has never happened. Incidentally, spokesperson of Banco de Mexico, Ricardo Medina Macias was asked about this strategy, but Ricardo declined to make any comment on this.
On 18th January, the policy makers of Mexico left the interest rate unchanged at 4.5%, an all-time low for a record 32nd consecutive meeting. While announcing the decision, Central Bank officials stated that if the trend of low general and core inflation gets confirmed, the one-day interbank interest rate reduction may be suitable. They added that such a rate cut will be introduced for lowering inflation and increasing the overall economic growth. According to SocGen’s Emerging Market Strategist, Eamon Aghdasi, the rally at yield curve’s front end is kind of overdone at this point of time.