Mexico Bank May Cut Interest Rate for First Time in Two Years
Mexico’s central bank will probably reduce its benchmark interest rate for the first time in more than 2 1/2 years to help bolster the country’s slumping economy.
The bank’s five-member board, led by Governor Guillermo Ortiz, will cut the lending rate a half percentage point to 7.75 percent, according to 14 of 27 economists surveyed by Bloomberg. Eight analysts expect a quarter-point decrease, one foresees a full point cut and four economists say the bank will keep the rate unchanged.
Lower rates may give a boost to Mexico’s economy, which Ortiz has said will probably contract this year because of the global financial crisis. The bank has room to cut without concern it will spur inflation because weakening consumer demand, and a government plan to trim energy costs, will moderate price increases, said Alfredo Coutino, a senior economist for Latin America at Moody’s Economy.com.
“The prospects for inflation have improved tremendously,” said Coutino, who is based in West Chester, Pennsylvania. “There is a high probability the central bank will start to relax monetary policy.”
Ortiz said Jan. 12 that Mexico’s gross domestic product will probably shrink in 2009 and that the government’s plan to reduce energy costs would allow the bank to adopt a monetary policy that “helps to mitigate the drop in economic growth.”
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 bank hasn’t cut rates since April 2006.
Price Freezes
On Jan. 7, President Felipe Calderon announced that state oil and power companies would freeze gasoline prices, reduce heating gas costs and lower electricity rates for some industries as part of a financial stimulus package. The initiative on energy costs will help slow inflation to about 4 percent by the end of 2009, said Fernando Losada, an economist at Deutsche Bank Securities Inc payday loan. in New York.
Still, policy makers may be hesitant to cut rates on concern that inflation, already at a seven-year high, won’t cool. Prices climbed 6.53 percent in December from a year earlier as a weaker peso drove up the cost of imported goods.
Inflation concerns may prompt policy makers to keep rates unchanged or make a smaller, quarter-point cut, said Bartosz Pawlowski, a strategist at TD Securities Ltd. in London.
“Inflation is still very high,” said Pawlowski, who says a cut to 8 percent is most likely. “A weaker exchange rate means higher import prices.”
Mexico’s Economy
The economy will contract in the first half of this year as scarce credit in international markets hurts investment and smaller remittances from Mexicans living abroad damps consumption, Finance Minister Agustin Carstens said Jan. 9. The economy contracted last quarter, Ortiz said last week.
Third-quarter economic growth of 1.6 percent was the lowest in five years. The country’s manufacturing index fell to a record low in December, the sixth straight month the index showed a contraction. A government report last week showed the economy, as measured by the country’s global economic indicator, shrank 0.9 percent in October.
Calderon’s stimulus plan, which includes increased infrastructure spending and unemployment benefits, will add 120 billion pesos ($8.6 million) to the economy, or about 1 percent of gross domestic product, Miguel Messmacher, the Mexican Finance Ministry’s chief economist, said Jan. 7.
“The Mexican economy is already in recession and the recession is going to deepen,” Pawlowski said. “There will be scope for rate cuts at each and every meeting from now on.”