Mexico’s central bank makes another half-point cut to interest rates
Jude Webber in Mexico City
Mexico’s central bank chopped another 50 basis points off its key lending rate — its fourth consecutive cut of that size and ninth reduction in a row — bringing the level to 5 per cent in a widely-expected move intended to help the Covid-battered economy.
“This is not the last cut,” said Christian Lawrence, senior market strategist at Rabobank, although he ruled out dives to below one per cent, as in Chile and Peru.
At 5 per cent, rates are at their lowest since late 2016. But with Covid-19 still raging in Mexico and the economy widely expected to slump by at least 8 per cent this year, despite inflation being largely under control, “more action likely will be needed”, wrote Andrés Abadía at Pantheon Macroeconomics in a note to clients, stressing that lower rates would reduce the cost of working capital for businesses.
Mexico has officially confirmed close to 200,000 cases and more than 24,000 deaths, although very low testing means the numbers are underestimates.
“Banxico, in our view, would be wise to get ahead of the current bleak scenario in which the disease continues to spread over the next few weeks, discretionary spending remains weak for the foreseeable future, and businesses continue to fail. Monetary policy can’t fix the current economic mess, but it can ameliorate some of the effects of the pandemic. Accordingly, we expect another 50bp rate cut in August, and we’re not ruling out Banxico rates as low as 4% by late Q3,” Mr Abadía wrote.
Banxico’s latest rate cut was a unanimous move.
ING economist Gustavo Rangel noted that Banxico’s policy stance “can hardly be justified by Mexico’s economic cycle prospects, given the grim outlook for economic activity and the relatively benign inflation trends”. He was now penciling in two more consecutive 50 basis point cuts, one possibly in an unscheduled meeting although the market consensus is for rates to end the year at 4.5 per cent.
Banxico’s next rate-setting meeting is on August 13.