Further Mexico rate reductions look likely

Significance

The move follows reports from the National Institute of Statistics on August 23 that GDP had grown by just 0.02% quarter-on-quarter in the second quarter (Q2) of 2019. With Q1 having shown a negative figure, Mexico narrowly avoided recession. The results confirm a sharp economic slowdown since the second half of 2018. On August 15, Banxico lowered its target interest rate by 25 basis points to 8.0%.

Impacts

• The monetary loosening should reduce the temptation of some legislators to alter Banxico’s mandate in the pursuit of economic growth.
• Given the sharp economic slowdown, the monetary loosening will probably have only a marginal impact on credit.
• With inflation falling, real interest rates are increasing, and should continue to act as a brake on economic activity.