Mexico's Central Bank lowers interest rate to 5.5% amidst the economic recession

On Thursday, the Bank of Mexico (Banxico) responded as the market expected on its third cut of 50 basis points to the interest rate over the year, which already stands at 5.5%.

The decision was approved unanimously by the members of the board headed by Governor Alejandro Diaz de Leon, who warned of an "unprecedented" impact on economic activity, implying financial shocks, as well as inflationary pressures.

"There are important challenges for the monetary policy and the economy in general, and considering the space that these give to the monetary policy in the balance, with the presence of all its members, the Governing Board unanimously decided to reduce by 50 basis points the target for the Interbank Interest Rate for one day to a level of 5.5%," announced the Central Bank in a press release.

Mexican economy dropped 2.4% on Q1

During the meeting, an even sharper fall in the second quarter of the year was reviewed, compared to the first three months of the year, which was 2.4%, which will also bring about higher employment losses. It is worth recalling that, according to IMSS (Mexican Social Security Institute) data, in April, the first month in which phase 3 of the pandemic was declared, 550,000 jobs were already lost.

"Thus, the conditions of comfort continue to expand considerably, in a context where the balance of risks to growth is significantly downward," the institution said.

Inflation continues to decline, mainly as a result of a sharp reduction in energy prices, particularly gasoline, which means that general short-term inflation expectations have decreased, while medium- and loterm expectations remain stable at over 3%.

In the financial sector, they recognize a "significant deterioration" that causes a reconstitution of investment portfolios towards lower-risk assets and the greater contraction in the holding of assets in emerging economies, especially in fixed income instruments. "This adjustment led to a depreciation of their currencies and volatility in their foreign exchange markets, including the Mexican peso".