Thursday, December 7, 2023

Central bank cuts benchmark rate to 6.5% in response to pandemic

The Bank of México (Banxico) cut its benchmark rate by 50 basis points to 6.5% on Friday, mimicking other central banks around the world that have eased rates in response to the global coronavirus pandemic.

The decision came after an unscheduled meeting of the Banxico board whose members were not due to meet until March 26.

“Considering the risks for inflation, economic activity and financial markets derived from the Covid-19 pandemic, significant challenges arise for monetary policy and the economy in general. In the face of the forecast impact, with the presence of all of its members, the board decided by a majority to reduce … the interbank interest rate …” the central bank said in a statement.

It added that one board member voted in favor of a quarter-point rather than a half-point cut.

Noting that the value of the Mexican peso has declined significantly, the prices of raw materials, especially oil, have fallen markedly, financial conditions around the world have deteriorated and global growth forecasts have “severely” slumped, the Bank of México said that it would also take additional measures to “provide liquidity and improve the operation of domestic financial markets.”

They include reducing the minimum amount of cash reserves that banks must hold and offering dollar auctions.

The central bank said that the impact of the coronavirus pandemic on economic activity in Mexico, “in the context of greater weakness in the global economy,” will result in a “deterioration of growth prospects.”

The prediction comes three weeks after Banxico cut its growth forecast for 2020 to between 0.5% and 1.5%, citing weakness in the global economy, trade tensions and the outbreak of coronavirus as factors.

With cases of Covid-19 increasing in Mexico and around the world, that forecast now looks fanciful.

Investment bank Credit Suisse is now predicting that the Mexican economy will contract 4% this year while the Bank of America anticipates that GDP will shrink by 4.5%.

With regard to inflation, the Bank of México said that it expects the rate to continue to trend downwards, albeit more slowly, toward the goal of 3%. Lower energy prices will help push prices down but the falling exchange rate could place upward pressure on the inflation rate, Banxico said.

Source: El Financiero (sp) 

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