Mexico Rate Decision, USD/MXN, COVID-19 – Talking Points:
- Bank of Mexico cuts overnight rate by 50 basis points, as expected
- USDMXN shifts higher as rate cut cycle continues
- COVID-19 worries continue to drive policy decisions
The Bank of Mexico continued its rate cut cycle amid the COVID-19 pandemic, which has prompted enormous monetary and fiscal responses around the globe. The Mexican central bank cut its overnight rate to 5.00% from 5.50%, as expected. USD/MXN price action drove higher as news crossed the wires. In line with other central banks, the Bank of Mexico cited virus-induced worries in easing the bank’s monetary policy stance.
USDMXN (1-Min Chart)
Source: IG Charts
Inflation risks were cited as overall uncertain in the monetary policy statement, including to the downside, “a greater than expected impact of the widening of the negative output gap” and to the upside, “additional episodes of foreign exchange depreciation.” Annual headline inflation was noted rising to 3.17% from 2.15% from April to the start of June. Even after today’s rate cut, Mexico’s interest rate remains higher than the majority of its emerging market peers.
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The Bank of Mexico’s statement also cited downgraded economic growth forecasts from multilateral organizations, one likely being the recently downgraded IMF forecast. Despite the upside improvements seen as some economies reopen, the consensus conveyed by the bank’s statement is one of uncertainty and the vote to lower the overnight rate by 50 basis points was unanimous. Some expected a hint towards ending the current rate cut cycle, however language in the policy statement appears to leave the door open for future cuts.