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Further Mexico rate reductions look likely

Friday, August 30, 2019

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.
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