The Bank of México (Banxico) cut interest rates yesterday for the first time in five years, citing slowing economic growth and lower inflation.
The Banxico board voted four to one in favor of cutting the bank’s key lending rate to 8% from 8.25%, which was a 10-year high.
It is the first time since June 2014 that the central bank has reduced borrowing costs. Since December 2015, rates had risen 5.25%.
“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 tilted to the downside,” Banxico said in a statement.
The Mexican economy narrowly avoided entering into a technical recession after recording growth of just 0.1% in the second quarter of 2019. The economy contracted 0.2% in the first quarter.
In addition to maintaining prudent monetary policy, it is important to “promote the adoption of measures that foster an environment of confidence and certainty for investment,” Banxico said.
Central bank Governor Alejandro Díaz de León said in a radio interview that inflation has gone down “a little faster” than expected. The current rate of 3.8% is the lowest in 2 1/2 years.
Díaz de León said that stagnating economic activity over several quarters “has given the bank space to believe” that inflation will converge towards the 3% target.
However, the central bank said that any move by the United States to impose new tariffs on Mexican exports could pose a threat to lower inflation.
In yesterday’s statement, Banxico cited downgrades to the sovereign credit rating and that of the state oil company as well as uncertainty in the relationship between Mexico and the United States as risk factors for the economy.
“It is necessary to attend to the deterioration in the sovereign credit rating and that of Pemex as well as meet fiscal goals for 2019,” the bank said.
It said that it is important for the government to present a 2020 budget that generates confidence, adding that it is “essential” that it also strengthen the rule of law and combat corruption and insecurity.
The rate cut follows a July 31 decision by the Federal Reserve in the United States to reduce borrowing costs in that country for the first time since 2008. Central banks in New Zealand, Thailand and the Phillipines also recently cut rates as the global economy shows more signs of slowing.
The peso weakened slightly on news of the cut but quickly recovered. It is currently trading at about 19.5 to the U.S. dollar.
Banxico’s decision is welcome news for President López Obrador, who told Bloomberg News late last month that he believed that Mexico’s interest rate was too high for a decelerating economy.
After reiterating his respect for the central bank’s autonomy, López Obrador said that he would like Banxico not only to contain inflation but also think about how it can help to stimulate growth.
“At the Bank of México, they’re paying more attention to inflation, which isn’t bad . . . but it is important to lower rates to encourage growth,” he said on July 29.
López Obrador said today that the rate cut would “stimulate growth” and make the productive sector more profitable.
“The economy is good, there is a favorable environment,” he said.
Many analysts said that they expect Banxico to cut rates again before the end of the year.
“With inflation set to fall further and growth to stay weak, we expect another 50 basis points of rate cuts to 7.50% by year-end,” Edward Glossop, Latin America economist at Capital Economics, said in a note to clients.
Charles Seville, a Latin America analyst at the ratings agency Fitch, said that “depending on the trajectory of Fed rates, the door may be open to further rate cuts.”