August 21, 2019 / 7:29 PM / 3 months ago

LatAm's big two central banks warn of weakening growth, inflation outlook

BRASILIA/MEXICO CITY, Aug 21 (Reuters) - The heads of the Mexican and Brazilian central banks said separately on Wednesday that sluggish global and domestic economic growth is putting downward pressure on inflation, suggesting that interest rates in both countries will be cut again soon.

The U.S.-China trade war and growing fears of recession in the United States and the euro zone have dented emerging economies and increased expectations that central banks will have to act more to support growth.

Official figures for the second quarter of the year released last month showed that Mexico only narrowly avoided recession, something that Brazil's second-quarter growth figures next week should also confirm, analysts say.

But with the two governments restricted in terms of their ability to stimulate growth due to weak budgetary positions, financial markets are betting on further rate cuts from both central banks, particularly Brazil's.

In a presentation to lawmakers in Brasilia on Wednesday, central bank president Roberto Campos Neto repeated the Brazilian central bank's view that while the next policy steps depend on incoming data, the evolution of risks and inflation expectations, the weak economic environment warrants stimulative monetary policy.

"The evolution of the base-case (economic) scenario and, in particular, of the balance of risks warrants adjustment in the degree of monetary stimulus," Campos Neto said in to the text of his presentation to lawmakers made public by the central bank.

"The increasingly benign scenario for prospective inflation should allow for further adjustment in the degree of stimulus," he said.

At an event in Mexico City, Bank of Mexico Governor Alejandro Diaz de Leon said the country's economy was growing below potential and the underperformance had become more apparent in the face of a slowdown globally.

"Regarding the global economy, growth expectations in a wide range of countries have been reduced in recent quarters," he said. "We are in a world where, although labor markets are strong, growth is weakening and inflation is much lower than expected."

Brazil's central bank cut its benchmark Selic rate last month by half a percentage point to a record low of 6.00%. Interest rate futures markets are discounting at least 75 basis points more easing over the next year or so.

Mexico's cut to 8.00% from 8.25% last week was not unanimous and was more of a surprise - the median consensus in a Reuters poll of economists was for no change - but swap rates point to official borrowing costs being cut again.

Annual inflation in both countries is running below 4.00%. (Reporting by Sharay Angulo in Mexico City and Jamie McGeever in Brasilia Editing by David Alire Garcia and Leslie Adler)

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