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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 growth during global volatility that has hit the peso.
The Bank of Mexico’s board voted 3-2 to cut the benchmark rate to 10.75 per cent. The divided rate-setters warned the recent bout of global financial turmoil had hit the country on top of the prolonged “weakness” in the economy since the end of last year.
“The balance of risks to growth of economic activity remains biased to the downside,” the board said in its statement.
The peso strengthened against the dollar by the most in a week to 18.9 following the decision.
Mexico, the US’s number one trading partner, is regularly picked out by investors as a top potential beneficiary from the trend of nearshoring supply chains closer to the US. But an investment boom is yet to materialise, and analysts are forecasting just 1.8 per cent growth this year and 1.6 per cent in 2025, according to a central bank poll.
The country’s exports have been hurt by a strong currency, while ruling party plans for sweeping constitutional changes, looming government spending cuts and uncertainty around the US election are also weighing on sentiment.
Gabriel Lozano, economist at JPMorgan, said: “Economic activity is cooling on several fronts and that is what most worries me, the slowdown started before the cool down in economic conditions in the US.”
Left-wing President-elect Claudia Sheinbaum, who takes office in October, will have to manage the deteriorating economic environment while trying to slash the highest budget deficit since the 1980s.
Mexico’s peso, one of the most traded currencies in emerging markets, had been one of the top performers in recent years with investors piling into a lucrative carry trade fuelled by its relatively high interest rates.
But the peso is now 11.2 per cent weaker since the ruling left-wing party won a near-supermajority in June elections promising radical overhauls of the political and judicial systems.
In the past week, fears of a recession in the US, where Mexico sends three-quarters of its exports, added to the volatility as it reached a low of 20.04 pesos to the dollar on August 5, before falling back to below 19 pesos.
Banxico’s board appeared to dismiss the exchange rate volatility in its statement on Thursday, analysts said.
Liam Peach, senior emerging markets economist at Capital Economics, said: “The recent depreciation of the peso was . . . mentioned, but it was only a passing comment and doesn’t appear to have played a part in the central bank’s decision-making.”
Peach added the bank’s easing cycle would likely be slow and gradual.
Latin America’s central banks were at the forefront of the fight against inflation during the coronavirus pandemic, with the Bank of Mexico increasing rates in mid-2021, well before the US Federal Reserve.
In March, Banxico became the last major central bank in the region to start cutting rates. Some analysts believe there is still ample room to cut, should growth continue to disappoint.
Others highlighted that inflation has been accelerating for the past five months, reaching 5.57 per cent in July. Non-core price rises in items such as fruit, vegetables and energy have been particularly elevated.
In its statement, the central bank raised its forecast for inflation for the fourth quarter to 4.4 per cent, up from 4 per cent.
“It doesn’t make sense,” Gaby Siller, analyst at Banco Base, said. “This decision could affect the reputation of the Bank of Mexico . . . its inconsistent.”
The bank said a future inflationary environment may allow discussion of further cuts and that it will take into account that “global shocks will continue fading and the impact of weak economic activity.”
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