(Bloomberg) -- Mexico kept borrowing costs unchanged as mounting debt at the state oil company threatens to undermine confidence in the government’s finances even as the consensus sees inflation moderating.
The central bank, led by Governor Alejandro Diaz de Leon, kept the benchmark rate at a decade-high 8.25 percent, in line with all 26 economists in a Bloomberg survey. Analysts had also unanimously forecast a hold last month. More recently, the U.S. Federal Reserve this week slashed its projected interest-rate increases for this year to zero from two.
Slowing inflation, a stronger currency, a dovish Fed and forecasts for weaker growth now have economists and investors pricing in Mexico’s first rate cut since 2014 for as soon as mid-year. The reason rates are remaining steady at all is because Petroleos Mexicanos, the world’s most indebted oil major, could trigger a sovereign rating downgrade that could in turn spur capital flight and peso weakness, according to JPMorgan Chase & Co (NYSE:JPM).
The central bank "needs to anchor inflation expectations now," the bank’s chief economist Gabriel Lozano, before the rate decision. "As long as uncertainty on the new Pemex plan reigns, policymakers will remain very concerned, as the risk of a downgrade is quite big in our view."
Lozano doesn’t see an interest rate cut until next year as labor unions push up wages with job actions and salary demands, which may trigger inflation. Most economists, however, expect rates to start falling in November, according to the median estimate in a Citibanamex survey. They also foresee inflation falling to 3.70 percent by year-end, and the economy growing only 1.5 percent, down from 2.0 percent last year.
In early March, S&P Global (NYSE:SPGI) Ratings lowered its outlook for Mexico’s sovereign debt to negative from stable, saying the nation’s shift to limit private sector involvement in energy could lower economic growth prospects. The outlook shift on its BBB+ rating followed a two-notch downgrade by Fitch Ratings for Pemex to near junk.
President Andres Manuel Lopez Obrador has attempted two Pemex rescue packages, but neither has convinced markets. A third attempt will be presented in about two weeks, which will likely include up to $7 billion in aid from a rainy day fund to help pay down debt.
