The Bank of Mexico (Banxico) cut the benchmark interest rate on Thursday from 7.25 to 7%, this is the first reduction in the year and the fifth in a row.
Banxico detailed that while global financial conditions have continued its relaxation, “the risk balance for global economic activity remains soured downwards in the presence of various uncertainty factors, including the effects of the recent coronavirus outbreak.”
It indicated that economic activity in Mexico had remained stagnant for several quarters and weak, and that external and internal risks persist that could affect the performance of national financial markets.
Read: In 2020 there will be a ‘modest recovery’ although the economy will remain weak: Banxico
To lower the interest rate, the Banxico Governing Board took into account the levels reached by headline inflation and its outlook for monetary policy, the wider slack conditions of the economy, and the recent performance of external and internal yield curves.
Read: Banxico analysts expect the economy to grow 1.10% by 2020; estimate the dollar at 20.10 pesos
The Governing Board listed the risks to the expected trajectory of inflation. Upwards, resistance to declining underlying inflation prevails; wage increases affecting the labour market and prices; possible exchange rate adjustment by external or internal factors; larger-than-expected increases in agricultural prices, and a deterioration in public finances.
On the downside, the risks are an additional appreciation of the exchange rate; international energy prices for the coronavirus outbreak, and an expansion in slack conditions.
Why does Banxico cut the rate?
With this decision, what the Banxico seeks is that there is more money in circulation and that direct investment is also encouraged to boost Gross Domestic Product (GDP).
A low interest rate helps the economy grow by facilitating consumption.
When the benchmark interest rate is lowered, people are encouraged to take out a credit, for example, to buy a car, home, or to invest in a company. However, for savers it is not so positive, as their yields will be low
On 15 August, Banxico lowered the interest rate to 8% from a peak of 8.25%, for the first time in more than five years.
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