Facing recession, Mexican central bank cuts interest rates

MEXICO CITY – Mexico’s central bank slashed interest rates by three-quarters of a point Friday, taking more aggressive action to protect the economy of a key U.S. trading partner from further damage by the global recession.

The Bank of Mexico defended its decision, arguing in a statement that the worsening global economic crisis, especially in the industrialized world, “is significantly affecting financial markets, capital flows and the development of emerging economies.”

Last month, the bank was conservative and lowered interest rates a quarter point, shaking investor confidence and sending the peso to record lows against the dollar. Friday’s action brought interest rates to 6.75 percent.

Most analysts expected the bank to cut interest rates a quarter point Friday, while a few others, like Roberto Melzi, predicted as much as half a point.

Melzi, a Mexico strategist for Barclays Capital in Mexico City, welcomed the move.

“This is a sign, we think, that the bank is going to be much more aggressive in the future,” he said. “It has been a very timid central bank.”

While many in Mexico complain that interest rates are too high, the bank has shied away from deep cuts, mostly because the country is still struggling with relatively high inflation and a weak currency. The peso strengthened slightly Friday to 14.1 to the dollar. The peso has lost more than 30 percent of its value against the dollar since August.

Friday’s cut was the bank’s third since 2006. It slashed its lending rate by 50 basis points to 7.75 percent on Jan. 16 in an effort to revive slowing growth.

Mexico, which sends 80 percent of its exports to the United States, has been hit hard by the U.S. downturn. The economy contracted 1.6 percent in the last quarter of 2008, and the bank has predicted another contraction for the first quarter, suggesting that Mexico would officially enter a recession, defined as two straight quarters of negative growth.