Mexico central bank cuts lending rate to 7.75 pct

The Associated Press

Published: January 16, 2009

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MEXICO CITY: Mexico's central bank cut interest rates for the first time since 2006 on Friday to boost the country's slowing economy as it inches toward recession.

The bank lowered its benchmark lending rate 50 basis points to 7.75 percent. It had resisted changing its rate since August in an effort to balance slowing growth and rising inflation, which reached a seven-year high of 6.5 percent in 2008.

Price gains should start slowing this month, though, as the economic downturn deepens and Mexico's government freezes gasoline prices and slashes electricity and natural gas costs, central bank president Guillermo Ortiz said last week.

Growth slowed to a projected 1.8 percent in 2008, and Ortiz has suggested it could be negative this year.

Mexico, which sends 80 percent of its exports to the United States, has been pummeled by the U.S. recession, with sales of oil, manufactured goods and vehicles falling. A 40 percent decline in the peso since August has meanwhile boosted import costs, fueling inflation.

President Felipe Calderon last week pledged 2 billion pesos ($150 million) in spending to prevent layoffs, slash energy costs and spur growth.

"The monetary relaxation is going to be a positive signal for markets and it's going to let the economy mitigate the negative impact from the U.S. recession," said Alfredo Coutino, senior economist for Latin America at Moody's Economy.com.

Still, "there is a probability that the combination of the government's fiscal stimulus with the bank's monetary relaxation are not going to be enough for the economy to avoid the recession," Coutino added.

Treasury Secretary Agustin Carstens has said the economy will contract in the first half of 2009 and end the year with zero growth.

While the U.S. recession will hurt its neighbor, officials have said that Mexico is in better shape to weather the storm than in years past. The central bank has accumulated more than $30 billion in foreign currency reserves since Mexico's own 1995 financial crisis, allowing it to auction off more than $15 billion to prop up the battered peso last year.

Coutino warned the peso could slide to a record low 15 to the U.S. dollar before stabilizing around 13 to the dollar later this year. The peso was trading at 13.8 to the dollar on Thursday morning.