Economy

In the face of a global slowdown, Mexico cuts lending rates to a historical low

The move was not expected before September. But then again, everybody else is doing the same thing

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  • Mexico’s Central Bank (Banxico) has decided to cut the key lending rate of the country from 8.25% to 8% per year for the first time in five years;
  • The global fear of a slowdown is not only found in Mexico;
  • A study by BNY Mellon Asset Management listed nine countries on the verge of recession. Brazil, Argentina and Mexico are among them.

The board of Mexico’s Central Bank (Banxico) has decided to cut the key lending rate of the country from 8.25% to 8% per year for the first time in five years. Just one of the six members of the institution’s board has voted to maintain the rate. 

The move was not expected by analysts before September. The decision was made under the menace of a global slowdown. Mexico’s Central Bank Governor Alejandro Diaz de Leon Carrillo said to Reuters that slowing inflation–around 3.8% now–as one of the reasons for the rate cut. He also said that the institution will pay attention to the new information and uncertainty over the coming weeks, fuelling expectations that further monetary policy actions could be on the way.

The global fear of a slowdown is not only found in Mexico. Last week countries like New Zealand and the Philippines also cut rates to a record low. In the beginning of August it was the time for cuts also in Brazil and the United States. 

On the occasion, the Federal Reserve had announced the deepest cut in interest rates in over a decade, to a range of 2% to 2.25% per year. On the same day, the Brazilian Central Bank had also reduced its interest rates, a move that took the number to its lowest level in the history of the country: 6 % per year. 

In the United States, the move targeted the sustaining of economic expansion. It was the first cut in interest rates since 2008, aimed at supporting the US economy in the face of trade disputes with China.

In Brazil, the cut was also aimed at stimulating the economy, but taking a different approach, as the country emerged from its worst recession in 2018 and has recorded very low growth rates since then.

Generally speaking, interest-rate cuts reduce the cost of credit, which also results in lower rates for consumers and helps to stimulate the economy. But this usually only happens after a while and if other factors like default and market concentration are also under control, i.e. low.

Emerging countries such as Brazil and Argentina are suffering, as are other nations highly dependent on external commerce, such as Singapore. The times are not good for overseas economies. China’s tumble and Trump’s trade war are undermining the exchange of goods that was the engine of the global economy for decades, and many countries are facing a sharp decline in exports.

A study by BNY Mellon Asset Management – one of the world’s 10 largest investment managers – listed nine countries on the verge of recession: Germany, Italy, United Kingdom, Mexico, Brazil, Argentina, Singapore, SouthKorea, and Russia. 

If the governments of China and Germany, for example, decide to take measures to stimulate the economy, this may help everyone, but the impact of global deceleration on each country will still depend on their structural conditions. In this sense, Brazil and Argentina have a lot of homework to do yet.

On Friday (16), the Minister of Economy, Paulo Guedes, said the country “is ready for the dollar at BRL 4.20,” referring to the currency’s rise, a direct result of global tension and the search of investors looking for more security in the world’s strongest currency, among other factors. According to Reuters and Forbes, He indicated that he would have no problem with the central bank reducing its $ 385 billion of foreign exchange reserves.