Mexico Cuts Key Rate 50 Basis Points in Unscheduled Decision

(C) Bloomberg. A pedestrian wearing a protective mask and gloves passes in front of closed kiosks on Santiago Arguello street in Tijuana, Mexico, on March 23. Photographer: Alejandro Cegarra/Bloomberg

(Bloomberg) — Mexico’s central bank delivered a second emergency interest rate cut 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 6% at an unscheduled meeting on Tuesday. Officials had already surprised markets with a similar, half-percentage point cut on March 20.

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

“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.”

Read More: Mexico to Shut Down Wells a Week After Refusing Deep OPEC+ Cuts

Banxico’s governing board also said Tuesday that it’s taking 10 additional measures to foster orderly operations in the financial markets, for a total of 750 billion pesos ($31 billion) — or 3.3% of gross domestic product.

The announced measures included opening windows to purchase government and corporate debt, “widen” standards for collateral for liquidity facilities as well as provide funding to commercial and government banks to support small businesses.

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.

Banxico Governor Alejandro Diaz de Leon said in an interview after the March surprise rate cut that the board was prepared to act outside its normal calendar of set meetings again if needed.

So far, Mexico’s monetary response has yet to be followed by any meaningful 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.

(Updates with economic forecast in third paragraph.)

(C)2020 Bloomberg L.P.