Banxico Cuts Rate by 25bp

Banxico has cut the monetary policy rate by 25bp to 7.50%. The sharp fall in demand and in US employment is negatively impacting economic activity in Mexico, the bank says, adding that inflation has been dropping since January. The consensus was for a 50bp cut. “On the one hand, virtually all economic indicators show that the economic downturn in Mexico has deepened in late 2008 and early 2009, which would justify, in theory, an aggressive rate cut,” says Credit Suisse, which correctly predicted the quarter point reduction. “On the other hand, however, the Mexican peso has continued to weaken against the US dollar to near record lows, increasing the danger that part of this weakness will show up in inflation,” the shop adds. UBS Pactual, which also forecast a 25bp drop, says the central bank is now more focused on the value of MXP relative to USD, on the assumption that a larger interest rate cut will put the peso under pressure.