Mexico Bank Lowers Rate to 4.75% to Support Economy
Mexico’s central bank cut its benchmark interest rate for a sixth consecutive month in a bid to bolster the country’s flagging economy, and said it would soon stop lowering borrowing costs.
The bank’s five-member board, led by Governor Guillermo Ortiz, lowered the key lending rate a half percentage point to 4.75 percent. The decision matched the forecasts of 22 of 26 economists surveyed by Bloomberg. Three analysts expected a quarter-point cut and one predicted a 0.75-point reduction.
The board “considers that its easing cycle is close to ending,” the bank said in a statement. “Future actions that might be taken will possibly be of smaller magnitude and consistent with both the evolution of the economy and the performance of inflation.”
The economic contraction has been “severe” in the first half of the year, and is a greater risk than inflation, the bank said. The comments signal that it will probably cut a quarter point next month and then keep the rate unchanged for the rest of the year, said Gabriel Casillas, chief economist for Mexico and Chile at UBS AG.
Latin America’s second-biggest economy shrank the most in 14 years in the first quarter and industrial output has declined for the last nine months.
‘Downbeat’
“The statement was downbeat about the prospects for Mexican growth,” Rafael de la Fuente, chief Latin American economist at BNP Paribas, said in a report. “The central bank’s assessment of the external greenshoots is also mixed and less upbeat than what we have seen from other central banks.”
Mexico’s peso gained 0.3 percent to 13.3548 per U.S. dollar as of 12:53 p.m. New York time from 13.3904 yesterday, according to data compiled by Bloomberg.
Barclays Capital changed its rate outlook today, interpreting the bank’s statement as “somewhat hawkish.” The bank will cut borrowing costs by a quarter percentage point next month and likely leave rates unchanged in subsequent months, according to the forecast low fee payday loans. Barclays had expected the bank to cut by a half point in July and a quarter point in August.
Gross domestic product shrank the most since the 1995 Tequila Crisis in the first quarter, output has tumbled every month since July, including a 13.2 percent plunge in April, and sales of goods abroad have fallen by more than a third in the last year.
Swine Flu
The swine flu outbreak in April and May also battered the economy as the government shut schools, restaurants and theaters and foreign tourism revenue plunged. The flu may reduce GDP by 0.5 percent this year, Ortiz said last month.
“The contraction of economic activity in the first half of the year has been severe,” the bank said in its statement. This decline “implies a more significant deterioration in the balance of risks on the side of economic activity than for inflation.”
Ortiz said in a June 11 interview that inflation will slow at a “rapid rate” and that a recent rise in global commodities prices is “less threatening” than when those costs reached their peak. The effect of a weaker peso on prices has mostly ended, he said.
Annual inflation slowed to within the bank’s second-quarter forecast of 5.5 percent to 6 percent for the first time in May as the monthly rate fell the most in two years. Ortiz said inflation will meet the bank’s forecast for the quarter.
Lower interest rates can help prompt businesses to invest and consumers to buy on credit. Cheaper loans also can spur inflation by strengthening demand.
“The main argument for lowering the rate is the state of the economy,” said Benito Berber, an economist at RBS Greenwich Capital Markets in Greenwich, Connecticut. “The industrial sector is contracting at double-digit rates.”