First Easing of Mexican Monetary Policy in Three Years

January 16, 2009

The Banco De Mexico cut its benchmark lending rate by 50 basis points from 8.25% to 7.75%. Analysts had been closely split over whether the central bank would inaugurate policy easing as soon as now.  As with most central banks, forecasts that opted for the more aggressive policy approach did best.  Real GDP grew only 1.6% in the year to 3Q08, and Mexican share prices are down about 40% from a year ago in U.S. dollar terms.  But CPI inflation of 6.2% in the year to November was still well above a 3.9% increase in the prior twelve months.  As in the case of Turkey, the authorities overlooked a weak exchange rate and went ahead with a significant rate cut.  The U.S. trade deficit with Mexico of $3.515 billion in November was at a 40-month low, as import demand by Mexico’s northern neighbor has declined sharply. 


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