MexECON Blog

Central Bank Cuts Rates to 3.75 Percent

In a decision on Friday, policymakers at Banco de México cut their benchmark interest rate to 3.75%.  That followed a cut to 4.00% in March, after the rate had stood at 4.50% since 2009.  In their statement, the policymakers said the economic weakness that took hold in Mexico in late 2012 had intensified significantly in the second quarter of 2013.  The policymakers noted that the weakening was faster and deeper than expected, reflecting softer demand both externally and domestically.  As a result, they believed the downside risks to the Mexican economy had increased.  The policymakers expected activity to begin recovering in the coming quarters, but they still expected growth for full-year 2013 and 2014 to come in below previous forecasts.  With inflation remaining on a downward trend and upcoming tax reforms expected to further strengthen the government's fiscal stance, the policymakers felt that cutting rates would be appropriate to address the slack in the economy.

Comment:  The cut in interest rates is further evidence that the Mexican economy is suddenly and unexpectedly skating on thin ice.  In fact, this week's report on the July index of leading economic indicators suggested the economy is trending toward outright recession.  Mexican gross domestic product (GDP) declined on a quarter-to-quarter basis in the second quarter, in part because of tepid U.S. demand for Mexican exports.  However, the pullback also reflected domestic problems such as weak government spending since the inauguration of the country's new president last December, a shift in housing policy that has crimped construction, and lower consumer demand.  Some recent data out of Mexico look slightly better, but the bulk of the reports suggest GDP could still fall in July through September for the second straight quarter, meeting the standard definition of a recession.  The central bank is probably correct that the Mexican economy will recover some momentum in the near future, especially given the improvement in the country's economic competitiveness in recent years, the expected acceleration in U.S. growth, and the likelihood that Mexico's new administration will finally loosen fiscal policy and support more growth initiatives.  For now, however, Mexico is looking much worse than it did during the extraordinary boom of the last several years.

Patrick Fearon, CFA
Vice President, Fund Management

Benchmark Rate 1309

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