The Bank of México cut its benchmark interest rate by 50 basis points on Tuesday and announced 750 billion pesos (US $30.5 billion) in support for the financial system to help the economy weather the coronavirus-fueled downturn.
In a widely-anticipated move, the five members of the central bank’s board voted unanimously to lower the overnight interbank rate to 6%. The out-of-cycle cut came a month after the bank lowered its benchmark rate to 6.5%.
Goldman Sachs economist Alberto Ramos and Marco Oviedo of Barclays are both predicting that Banxico, as the central bank is known, will make further cuts this year to leave the benchmark rate at 4.5% at the end of 2020.
Banxico said that its rate cut and the 750-billion-peso support package – Mexico’s most momentous move yet to support the ailing economy – will “foster an orderly behavior of financial markets, strengthen the credit channels and provide liquidity for the sound development of the financial system.”
Along with measures already announced, the support is equivalent to 3.3% of Mexico’s GDP in 2019.
Banxico said that commercial and development banks will be able to access a 250-billion-peso fund to boost their lending to small and medium-sized businesses as well as individual borrowers.
The central bank also said that it would add hedge transactions settled by differences in United States dollars to its foreign exchange intervention armory in order to “provide orderly operating conditions in the MXN/USD exchange market, particularly during Asia and Europe trading.”
Finance Minister Arturo Herrera, who attended Tuesday’s Banxico board meeting, said on Twitter that the government is working with the central bank “to permit the operation of currency hedges 24/7 and reduce the volatility of our currency.”
The Mexican peso, one of the most traded emerging market currencies, has been hit hard by the coronavirus pandemic as investors abandon it in favor of safe-haven currencies, especially the US dollar. It was trading on Wednesday morning at about 24.6 to the dollar.
The coronavirus crisis is predicted to take a heavy toll on the Mexican economy, which was in recession even before the first case of Covid-19 was reported in Wuhan, China, in late December.
Banxico said on Tuesday that GDP could shrink by 5% in the first half of 2020 compared to the first six months of last year.
The United Nations Economic Commission for Latin America and the Caribbean (ECLAC) and the financial institution Citibanamex also updated their forecasts on Tuesday, predicting that the Mexican economy will contract by 6.5% and 9%, respectively, this year.
The Business Coordinating Council (CCE), an umbrella organization made up of 12 prominent business groups, has warned that the economy could contract by 7% this year if the government doesn’t ramp up support. It has also said that between 1 million and 1.2 million jobs could be lost.
While the CCE has been critical of the government’s economic response to the coronavirus crisis, it praised the measures announced by the central bank on Tuesday.
“With this policy response, the Bank of México is contributing with its tools to the relief of the national situation,” the council said, adding that it had asserted its autonomy from the government.
Joel Virgen, chief Mexico economist for French bank BNP Paribas, said that the central bank was compelled to respond forcefully to the economic crisis with monetary policy because the government has failed to do so with fiscal policy.
“Context is key; up to this point Mexico’s fiscal effort has been timid in absolute terms and also in relative terms if we compare it with its Latin American peers. This context definitely played [a role] in Banxico’s decision to act more decisively,” he said.