Mexico’s central bank cut the benchmark interest rate to its lowest level in three-and-a-half years as the nation falls into a recession that economists say will be the worst in decades.
Banco de Mexico reduced borrowing costs by half a point to 5.5 percent, as forecast by 20 out of 22 economists in a Bloomberg News survey.
The move followed two unscheduled rate cuts of half point each in March and last month, as the normally hawkish central bank moved quickly to contain the impact of the COVID-19 pandemic and plunging oil prices.
Photo: AP
Mexico faces an economic contraction that might reach as much as 12 percent this year, according to the most pessimistic forecast by BBVA analysts.
“I am surprised that the decision was unanimous, after some board members had hinted at the need to move faster,” said Alonso Cervera, chief Latin America economist at Credit Suisse Group AG.
The board is “refraining from declaring victory over inflation despite the collapse in growth.”
Unless the bank gives new guidance in upcoming days or weeks, the strong central scenario would be for a 50 basis-point cut at its next meeting on June 25, Cervera said.
The central bank board stated in the communique that accompanies its decision that it saw an economic slump deepening in the second quarter of this year, along with a significant contraction in employment.
Central bank policymakers on Thursday suggested that fiscal stimulus would be helpful to financial markets and the economy.
“Persevering in strengthening macroeconomic fundamentals, and adopting the necessary actions — both in monetary and fiscal areas — will contribute to a better adjustment of national financial markets and to the economy as a whole,” the central bank board wrote it in its statement.
The nation posted record losses of formal jobs last month, as Mexican President Andres Manuel Lopez Obrador steadfastly resists major fiscal stimulus or bailouts for the nation’s largest companies.
The easing cycle has seen Mexican rates decline from 8.25 percent in less than a year, and is widely expected to continue. Swap markets are pricing a terminal rate near 4.2 percent in a year before staging a rebound.
Despite the pace of reductions, Mexico continues to maintain one of the world’s highest real rates to protect the Mexican peso and limit inflation.
However, slowing inflation has bolstered expectations for easing, as prices fell 1.01 percent last month, the most for any one-month period since at least 1969.
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