Mexico’s central bank on Thursday cut its key lending rate for the first time since June 2014, citing slowing inflation, widening slack in the economy, and the recent behavior of the external and domestic yield curves.
In a majority decision, the Bank of Mexico’s (Banxico) five-member board voted to lower the overnight interbank rate by 25 basis points to 8.00%. One board member voted to maintain the rate at 8.25%, the bank said in a statement.
Eleven of 16 analysts and economists surveyed by Reuters had expected Banxico to hold the rate at 8.25%, the level it had maintained since Dec. 20. Five of those surveyed expected a rate cut of 25 basis points.
“Slack conditions in the economy have continued to loosen, even more than expected, widening the negative output gap. In an environment of significant uncertainty, the balance of risks for growth remains tilted to the downside,” the bank said.
Bets the bank would cut had been increasing, even as most analysts expected a hold at Thursday’s meeting, as Mexico’s economy sputters and inflation eases.
Charles Seville, co-head of Latin America sovereigns at ratings agency Fitch, said the rate cut reflected lower inflation risks and greater domestic and global growth risks since the bank’s last meeting. “We still think Banxico will stay vigilant given domestic policy risks and the potential for risk aversion to affect the exchange rate, but depending on the trajectory of Fed rates, the door may be open to further rate cuts,” he said.
At the end of last month, the US Federal Reserve cut its main lending rate for the first time since 2008.
The Mexican rate cut could help boost the sluggish Mexican economy after paltry growth of 0.1% in the second quarter.
Helping to justify the cut was a third consecutive monthly slowdown in annual inflation in July, when the rate eased to 3.78%. The bank targets a rate of 3%, with a one percentage point tolerance threshold above or below that figure.