Another Mexican Central Bank Interest Rate Cut

June 25, 2020

The Governing Board unanimously cut the overnight interbank interest rate by 50 basis points to 5.0%. This was the fourth straight monthly cut of 50 basis points, and there was also a 25 basis point cut made in February and three 25-bp reductions during the last four and a half months of 2019. The rate is now 325 basis points below its 2019 cyclical high, and 5.0% represents its lowest level since since September 2016, that is just shortly before the election of Donald Trump. The cleansing of Mexicans from American soil was major policy priority of Candidate Trump, and Mexican relations with its Northern neighbor continue to be delicate.

In 2020, however, the Covid-19 pandemic and its consequences and two-way trade flows and overall economic activity have been the driving force behind monetary policy in Mexico and most other countries. Mexican real GDP contracted in the first quarter 4.9% annualized compared to the final quarter of 2019, and growth will be even more negative in the second quarter despite signs that conditions in May were less severe than in April. The future evolution of the pandemic is uncertain, and thus so is the growth outlook. But a statement released by the Governing Board today states that Mexican growth risks are tilted to the downside. Inflation should be aligned with the 3% target, but again risks are skewed to the downside in light of the ongoing negative output gap and the directionality of growth risks.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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