He Bank of Mexico (Banxico) decided reduce its reference interest rate by 25 basis points, placing it at 10.50%a level that had not been recorded since December 2022.
The decision, made in a divided manner by the Central Bank Governing Boardreflects a position regarding both the national and international economic environment, and marks the third consecutive reduction in its current cycle of monetary flexibility.
In its statement, Banxico indicated that future monetary policy decisions will depend on how the dissipation of global shocks and the evolution of economic activity, who has shown signs of weakness.
Furthermore, it will take into account the effects of the restrictive monetary stance which has been maintained and which, according to the institution, will continue to influence the dynamics of inflation.
What does this cut imply?
Analyst Gabriela Siller, from Banco Base, explained the implications of this interest rate cut. According to Siller, the reduction implies a lower cost of moneywhich leads to a decrease in credit rates and a incentive for consumption and investment.
However, also reduces the attractiveness of carrying out carry-trade operations in Mexicoa mechanism used by foreign investors to obtain profits from interest rate differences between countries.
Besides, The cut lowers the cost of financial debt for both government and businesses, and increases asset value.
The Mexican peso reacts:
Regarding the exchange market, the reaction of the Mexican peso against the dollar was immediate. Following Banxico’s announcement, the exchange rate experienced some volatility, reaching a maximum of 19.75 units per dollar during the session.
However, the Mexican currency managed to recover and closed the day at around 19.58 pesos per dollar, which represents an appreciation of 0.23% or 5 cents compared to the previous day’s close.
He interest rate cut It is also aligned with the downward revision of the inflation projections by the Bank of Mexicowhich confirms its view that inflationary pressures will continue to moderate in the short and medium term.
Besides, the US dollar recorded a drop of 0.40% in its weighted index, affected by the Chinese government’s commitment to implement stimulus measures to strengthen its economic growth.
Added to this was an increase in applications for unemployment support in the United States, which also contributed to weakening the North American currency in international markets.
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