Tuesday, November 28, 2023

With slow growth, low inflation, central bank cuts interest rate to 7.25%

The Bank of México lowered its benchmark interest rate 25 basis points to 7.25% on Thursday, citing slow economic growth and low inflation.

It was the fourth consecutive time that the central bank cut its benchmark rate by a quarter-point this year.

Predicted by all but one of 23 economists surveyed by Bloomberg, the move brings rates down to a level not seen since February 2018.

The Bank of México has not cut rates at four consecutive board meetings since 2009, when rates were lowered on seven consecutive occasions. One member of the bank board voted on Thursday to reduce the rate by 0.5%.

The central bank said in a statement that there has been some recent positive activity in the economy, noting that the peso has strengthened, partially as a result of the signing of a revised version of the new North American free trade agreement.

But it said that there is still uncertainty about debt ratings both for Mexico and the state oil company Pemex.

The bank highlighted the importance of complying with both “the 2019 fiscal goals and the objectives of the 2020 economic package,” adding that it is also “essential to strengthen the rule of law, bring down corruption and combat insecurity.”

It said that weakness in the economy seen over the past several quarters is estimated to persist, noting that “in an environment of marked uncertainty, the balance of risks for growth continues slanting downwards.”

The latest rate cut comes after the central bank downgraded its growth forecasts to between -0.2% and 0.2% this year and 0.8% to 1.8% in 2020.

Inflation has slowed to the target of 3% but the central bank said that the 20% increase to the minimum wage announced this week could drive up prices in 2020.

Bloomberg noted that even with yesterday’s cut, Mexico still has the highest real interest rate (borrowing costs minus inflation) among G20 countries.

Source: El Financiero (sp), The Associated Press (en), Bloomberg (en) 

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