Mexico Bank lowers rate to 4.75% to support economy

Mexico’s central bank cut its benchmark interest rate for a sixth consecutive month in a bid to bolster the country’s flagging economy, and said it would soon stop lowering borrowing costs. The bank’s five-member board, led by Governor Guillermo Ortiz, lowered the key lending rate a half percentage point to 4.75 %. The board “considers that its easing cycle is close to ending,” the bank said in a statement. “Future actions that might be taken will possibly be of smaller magnitude and consistent with both the evolution of the economy and the performance of inflation.” The economic contraction has been “severe” in the first half of the year, and is a greater risk than inflation. The comments signal that it will probably cut a quarter point next month and then keep the rate unchanged for the rest of the year. Latin America’s second-biggest economy shrank the most in 14 years in the first quarter and industrial output has declined for the last nine months. Mexico’s peso gained 0.3 % to 13.3548 per U.S. dollar from 13.3904 yesterday. Barclays Capital changed its rate outlook today, interpreting the bank’s statement as “somewhat hawkish.” The bank will cut borrowing costs by a quarter percentage point next month and likely leave rates unchanged in subsequent months, according to the forecast. Barclays had expected the bank to cut by a half point in July and a quarter point in August. Annual inflation slowed to within the bank’s second-quarter forecast of 5.5 % to 6 % for the first time in May as the monthly rate fell the most in two years. Lower interest rates can help prompt businesses to invest and consumers to buy on credit. Cheaper loans also can spur inflation by strengthening demand. Benito Berber, an economist at RBS Greenwich Capital Markets in Greenwich, Connecticut, commented: “The main argument for lowering the rate is the state of the economy. The industrial sector is contracting at double-digit rates.”