Mexico Cuts Key Rate to Three-Year Low in Emergency Decision

(Bloomberg) -- Mexico’s central bank delivered a second emergency interest rate cut and promised measures to boost liquidity amid a looming recession caused by the coronavirus outbreak and a plunge in oil prices.

Banco de Mexico reduced the benchmark rate by 50 basis points to a three-year low of 6% at an unscheduled meeting on Tuesday. Officials had already surprised markets with a half-percentage point cut on March 20.

The decision to repeat an unscheduled rate reduction by one of the world’s most hawkish central banks reflects the uncertainty surrounding the Mexican economy. Economists forecast gross domestic product will contract 5% this year, with some top banks predicting a fall of as much as 9%.

Mexico Cuts Key Rate to Three-Year Low in Emergency Decision

“Considering the risks resulting from the COVID-19 pandemic for inflation, economic activity and financial markets, major challenges arise for monetary policy and for the economy in general,” the statement read. “The negative effects on domestic economic activity resulting from the pandemic may lead to an important contraction of economic activity.”

The cut was widely expected, and the Mexican peso remained unchanged after the decision with markets pricing further rate reductions in the future.

“We were already expecting a cut prior to the May meeting and it should be noted that it does not say that the next one will be canceled,” said Mexico City-based BBVA analyst Claudia Ceja. “We could be expecting an additional cut soon.”

The central bank also announced a series of unprecedented moves to purchase securities and support financial market liquidity. All together, the measures totaled 750 billion pesos, or 3.3% of gross domestic product, the central bank said.

Still, Banxico’s measures are mainly aimed at increasing market stability and reducing distortions, shying away from a full-blown quantitative easing response seen in developed markets.

“It’s all focused on keeping markets functioning smoothly rather than being stimulative,” said Christian Lawrence, a strategist at Rabobank in New York.

Measures included opening windows for repurchase agreements on government and corporate debt, allowing foreign exchange hedge sales after the market close as well as funding for commercial and government banks to support small businesses. The central bank also said it would offer currency hedges to counterparties outside of Mexico in a bid to reduce peso volatility seen during Asian and European trading hours.

For many, the extent of the central bank’s program is enough to spark optimism.

“They look good, better than what was announced last time,” said BBVA’s Ceja. “The amount is higher and they are covering several fronts.”

The country has previously taken steps to increase liquidity in the currency market as the peso has depreciated more than 20% this year, including selling dollar-denominated credit financed by a swap line with the Federal Reserve twice.

So far, Mexico’s monetary response has yet to be followed by a large fiscal response from the administration of President Andres Manuel Lopez Obrador. The president has rejected the idea of bailouts for Mexico’s large companies as the effects of the coronavirus continue to hammer the nation’s economic outlook.

The spread of the coronavirus and accompanying oil slump has led the Mexican peso -- Latin America’s most-traded currency -- to lose over 29% of its value since the start of the year. On Friday, Moody’s investors Service downgraded both the country’s sovereign rating and the state-owned oil company Petroleos Mexicanos, citing the country’s weakness in the face of global shocks. The Moody’s decision came on the heels of S&P Global Ratings and Fitch Ratings, which had already downgraded Mexico’s credit.

©2020 Bloomberg L.P.

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