Mexico’s central bank cut its benchmark interest rate by a larger-than-expected 50 basis points to 4.0 percent to boost spending and growth, but stressed it was not embarking on a new cycle of easing and the rate cut would not jeopardize the path towards lower inflation. Banco de Mexico said its first rate cut since July 2009 was made possible by the country’s progress in anchoring inflationary expectations, reducing the persistence and volatility of inflation, the lack of second-round effects from price shocks and a significant decline in the inflation risk premium. But Mexico’s economy is now feeling the effects of an expected decline in U.S. growth where budget cuts are affecting prospects and there is uncertainty about Europe’s economic recovery. “The global economy continues to show signs of weakness,” the Bank of Mexico said, adding that rising unemployment will allow the economy to grow without stoking inflation. The rate cut comes after the central bank changed course in January and signaled that rate cuts may be in the offing after last year’s frequent warnings of rate hikes to control inflation. Mexico’s inflation rate rose to 3.55 percent in February from 3.25 percent in January but this is still well below 2012’s average rate of 4.11 percent. The central bank targets annual inflation of 3.0 percent, plus/minus one percentage point.
The central bank said the rise in February inflation is expected to be temporary with headline inflation rising to around 4 percent in coming months before settling down to a rate of about 3.0 percent in the second half of this year and in 2014.
Core inflation, which was slightly below 3.0 percent in February, is forecast to remain close to 3.0 percent and even below for most of 2013 and 20145.
“In sum, although inflation rates are expected to be higher in the short term, this is not expected to affect the converging path of inflation in the medium term,” the central bank said, adding that an expected reduction in government deficit in fiscal 2013 also helped paved the way for the rate cut.
“The Board believes that this measure, which does not represent the beginning of a cycle with the goal of a lower interbank interest rate benchmark, supports an expansion of spending in the economy according to its growth potential and a convergence inflation to the permanent objective of 3 percent,” the central bank said.
Mexico’s Gross Domestic Product grew by 0.8 percent in the fourth quarter from the third quarter for annual growth of 3.2 percent, the same rate as in the third quarter. In 2011 the economy expanded by 3.9 percent.