MEXICO CITY (REUTERS) – Mexico’s central bank on Thursday cut its benchmark interest rate for the first time since September, flagging uncertainty over the economic outlook and global efforts to tackle the COVID-19 pandemic.
Battered by the pandemic, Mexico’s economy last year suffered its biggest contraction since the Great Depression in the 1930s, shrinking by 8.5%, according to preliminary data.
The Bank of Mexico’s (Banxico) five board members voted unanimously to lower borrowing costs by 25 basis points to 4%, in line with the consensus forecast of a Reuters poll of economists earlier this week.
Banxico, which had kept rates unchanged at its last two meetings, said the balance of risks for inflation was uncertain, as was the outlook for economic activity. Risks for the economy were tilted downward, with ample slack, it said.
“Global risks prevail, including the rise in virus infections, delays in vaccine production and distribution, the sufficiency of fiscal stimuli, and other tensions,” the bank said in a statement with its decision.
Banxico said it expects headline inflation, which stood at 3.54% in January, to nudge higher in the second quarter.
“Headline inflation expectations for the end of 2021 were adjusted slightly upwards, and those for the medium and long term remained stable at levels above the 3% target,” it said.
The bank aims for inflation of 3%, and has a 1 percentage-point tolerance range above or below that.
Thursday’s decision was the first to include new board member Galia Borja, a former finance ministry official.
Nikhil Sanghani, Latin America economist at Capital Economics, said the latest decision suggested a dovish stance by Banxico’s rate-setters, and raises the chance of an additional rate cut at the next meeting in late March.
“That said, we suspect that policymakers will hold off from additional easing,” said Sanghani, noting that a temporary jump in inflation may put off Banxico from lowering rates.
(Reporting by Dave Graham in Mexico City; Editing by Drazen Jorgic and Matthew Lewis for Reuters)
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