Wednesday, June 12, 2024

Amid sluggish growth, central bank lowers interest rate to 7%

The central bank cut its benchmark interest rate by a quarter-point to 7% on Thursday, citing a weak economy and global uncertainty among other factors.

The five Bank of México (Banxico) board members voted unanimously to reduce the benchmark rate by 0.25%. It is the fifth consecutive time that the bank has lowered borrowing costs.

Greater slack in the economy, the current levels of inflation, the outlook for inflation and the recent behavior of external and domestic yield curves were taken into account in the decision to reduce the benchmark rate, Banxico said in a statement.

The cut came two weeks after the national statistics institute announced that GDP had contracted by 0.1% in 2019, the first decline since 2009, the year of the world financial crisis when GDP fell 5.3%.

The annual inflation rate rose to 3.24% in January but remains within the bank’s target range of 3% give or take a percentage point. However, the central bank said that it expects inflation to be “moderately above” the forecasts it published in its last quarterly report.

Banxico also said that the balance of risks for the global economy is skewed to the downside due to a range of factors of uncertainty, “including the effects of the recent outbreak of coronavirus.”

China, where the outbreak originated, is the world’s second largest economy and an important trade partner of Mexico.

Taking into account “the most recent information” about the state of the economy both in Mexico and globally, the Bank of México said that it expected domestic GDP growth in 2020 to be lower than the 0.8% to 1.8% range it forecast in its last quarterly report. Analysts consulted by the central bank have cut their outlook for this year to an average of 1% growth.

Bank of México Governor Alejandro Díaz de León confirmed in an interview with the newspaper El Financiero that the growth outlook for this year will be lowered in the next quarterly report, which will be published on February 26.

“Given the accumulated weakness [of the economy] and the most recent economic activity information, we anticipate that gross domestic product will grow at a slower pace than we predicted in the previous quarterly report,” he said.

Díaz de León declined to flag future interest rate cuts, stating that the bank board will continue to evaluate the prevailing economic conditions, including growth levels and inflation, and adjust rates accordingly.

For their part, analysts from the bank BBVA are forecasting a benchmark interest rate of 6% by August this year.

Alberto Ramos, chief Latin America economist at Goldman Sachs, said that he hoped that Banxico will continue to cut rates in the first half of 2020 due to the “persistent and weak” economic conditions, an “anchored” exchange rate and an inflation rate that remains within the target range.

Source: El Financiero (sp) 

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