Mexico’s central bank lowered its policy rate for the first time in 62 months, saying inflation has decreased as it expected but the economy continues to stagnate and the current uncertainty about the relationship with the United States, continues to pose a risk to economic growth.
The Bank of Mexico (Banxico) cut its benchmark target for the overnight interbank interest rate by 25 basis points to 8.0 percent, its first rate cut since June 2014 following 15 rate hikes from December 2015 through December 2018 in response to a weakening peso and inflationary pressures.
But in the wake of the U.S. Federal Reserve’s change of course in late January this year to a more dovish stance, which resulted in a rate cut on July 31, Baxico also shifted its policy stance and is now following the Fed and 53 other central banks that have eased their policy stance this year.
Banxico said a majority of its board member had voted to cut the rate, deciding that a lower interest rate is consistent with inflation converging toward its target of 3.0 percent. One board member voted to maintain the rate.
The board added that it would maintain a prudent monetary policy stance during the current environment of uncertainty and closely follow the potential pass-through of fluctuations to the exchange rate to consumer prices along with the behavior of economic slack and price pressures.
Noting the deceleration in world economic activity along with U.S. trade disputes, the central bank said the balance of risks to the world economy had deteriorated, and while the peso has fluctuated, interest rates on government securities have fallen and the latest data suggest weaker demand has widened the economy’s slack more than expected so the balance of risks to economic growth remains biased to the downside.
Free Reports:
In July Mexico’s inflation rate eased to 3.78 percent from 3.95 percent though inflation expectations remained relatively stable while the economy shrank 0.7 percent year-on-year in the second quarter after growth of 1.2 percent in the first quarter.
The Bank of Mexico released the following statement:
“Banco de México’s Governing Board has decided to lower the target for the overnight interbank interest rate by 25 basis points to 8.00%.
World economic activity decelerated during the second quarter of the year due to moderation of growth in the main advanced and emerging economies. In this environment, the outlook for growth for the world economy has been revised downwards once more. Likewise, disputes arose between the United States and other economies related both to trade as well as to issues associated with migration, technology and exchange rate policy. Headline and core inflation in the main advanced economies have remained at low levels and below their central banks’ targets. In this context, a large number of central banks have adopted more accommodative monetary policy stances. In its July meeting the US Federal Reserve cut the target range for the federal funds rate by 25 basis points and anticipated the end of its balance sheet reduction. Episodes of volatility in financial markets associated with the tensions between the United States and China, and with a greater than expected deceleration in some economies, have taken place. This environment has led to expectations of further monetary policy easing by several central banks. The risks faced by the global economy have increased: escalation of trade disputes, a disorderly Brexit, and the worsening of certain political and geopolitical risks stand out. For this reason, the balance of risks for world economic activity has deteriorated.
Domestic financial markets have been influenced by the effects of lower interest rates for all terms in the major advanced economies and by episodes of volatility. Thus, while the peso exchange rate fluctuated under these episodes, interest rates on government securities have decreased, including longer term ones. Regarding the risks that may affect the performance of financial assets in Mexico, uncertainty persists with respect to the bilateral relationship between Mexico and the United States and to the credit rating outlook both for Pemex’s debt and for Mexico’s sovereign debt.
The current environment continues to pose significant medium- and long-term risks that could affect thecountry’s macroeconomic conditions, its ability to grow, and the economy’s price formation process. Inthis regard, it is particularly important that, in addition to a prudent and firm monetary policy, measures to foster an environment of confidence and certainty for investment and higher productivity are adopted, and that public finances are consolidated in a sustainable way. In this context, addressing the deterioration of both the sovereign’s and Pemex’s credit ratings and achieving the fiscal targets for 2019 are necessary. It is also important that the Economic Package for 2020 generates confidence. Strengthening the rule of law, tackling corruption, and fighting insecurity are equally imperative.
The latest information suggests that during the second quarter of 2019, the stagnation of economic activity in Mexico observed in the previous quarters continued, due to a further weakening of most of the components of aggregate demand. Thus, slack conditions in the economy have continued to loosen, even more than expected, widening the negative output gap. In an environment of significant uncertainty, the balance of risks for growth remains biased to the downside.