2024-08-08 21:09:22
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Mexico’s central bank cut its benchmark interest rate by 25 basis points on Thursday as policymakers warned of downside risks to economic growth amid global turmoil that has hit the peso.
Mexico’s central bank board voted 3-2 to cut its benchmark interest rate to 10.75%. Divided rate-setters warned that Mexico had been hit hard by the latest bout of global financial turmoil and that the economy had been “weak” since late last year.
“The risks to the growth in economic activity remain tilted to the downside,” the board said in its statement.
After the resolution was released, the peso exchange rate against the US dollar rose by the most in a week to 18.9.
Mexico is the largest U.S. trading partner, and investors often single out the country as the biggest potential beneficiary of shifting supply chains closer to the U.S. But the investment boom has yet to materialize, with analysts predicting growth of just 1.8% this year and 1.6% in 2025, according to a central bank survey.
The country’s exports have been hit by a strong currency, while the ruling party’s plans for major constitutional reforms, looming government spending cuts and uncertainty over the U.S. election have also weighed on sentiment.
“Economic activity is cooling on multiple fronts, which is what worries me most, and the slowdown started before the cooling of U.S. economic conditions,” said Gabriel Lozano, an economist at JPMorgan Chase & Co.
Leftist President-elect Claudia Sheinbaum, who takes office in October, will have to deal with a worsening economic environment while trying to cut the largest budget deficit since the 1980s.
The Mexican peso is one of the most heavily traded currencies in emerging markets and has been one of the best performers in recent years, driven by its relatively high interest rates and investors engaging in lucrative carry trades.
But the peso has depreciated 11.2 percent since the ruling left-wing party won a near-outright majority in June elections promising an overhaul of the political and judicial systems.
Over the past week, the Mexican peso has fallen to a low of 20.04 per dollar on August 5, before retreating to below 19 per dollar, amid fears of a recession in the United States, where three-quarters of Mexico’s exports go.
Analysts said Mexico’s central bank board seemed unfazed by the exchange rate swings in its statement on Thursday.
“While there was some mention of the recent depreciation of the peso, it was only a passing mention and did not appear to have influenced the central bank’s decision,” said Liam Peach, senior emerging markets economist at Capital Economics.
Pizzi added that the central bank’s easing cycle would likely be slow and gradual.
Latin America’s central banks have been at the forefront of the fight against inflation during the coronavirus pandemic, with Mexico’s central bank raising interest rates in mid-2021, well before the Federal Reserve.
In March, Mexico’s central bank became the last of the region’s major central banks to start cutting interest rates, and some analysts believe it still has ample room to do so if economic growth continues to disappoint.
Others highlighted that inflation has been accelerating over the past five months, reaching 5.57% in July, with price increases particularly high for non-core items such as fruit, vegetables and energy.
In its statement, the central bank raised its fourth-quarter inflation forecast to 4.4% from 4%.
“It makes no sense. This decision could affect the reputation of Mexican banks … It’s inconsistent,” said Gaby Siller, an analyst at Banco Base.
The central bank said the future inflation environment could allow for discussion of further rate cuts and would take into account “the impact of global shocks that continue to fade and weak economic activity.”
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