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Better late than never: Mexico hacks key interest rate

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Mexico’s central bank dragged its feet on cutting short-term interest rates late last year, even as the global economy plunged into recession. Now it’s making up for lost time.

The Bank of Mexico today slashed its key rate to 6%, from 6.75%, the second consecutive cut of 0.75 points.

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From Reuters:

Mexico is tumbling into its deepest recession since the mid-1990s, hurt by a collapse in U.S. demand for its exports. The economy shrank more than 9% in January from a year earlier and is seen contracting more than 3% this year. The rate cuts come despite persistently high inflation, underscoring the bank’s concerns about faltering growth, and most economists expect more cuts in coming months. ‘The strong fall in aggregate demand in the United States and a contraction in global trade are having a very severe impact on economic activity in Mexico,’ the bank said in its monthly monetary policy statement. Mexico has been catching up this year with other Latin American countries worried about growth such as Chile, Colombia and Brazil, which have been hacking even harder at borrowing costs to jump-start their economies.

The Bank of Mexico had held its rate at 8.25% through last fall, despite the worsening global financial crisis, as policymakers sought to combat inflation.

This year, as the economy has unraveled, the bank ramped up rate cuts even though one effect was to send the peso plunging to record lows against the dollar, reaching 15.5 per dollar in early March.

But the peso has strengthened since then, along with other emerging-market currencies, as fears of global economic Armageddon have eased and investors have regained confidence in riskier markets. The peso was trading at 13.08 per dollar early today.

The Mexican stock market’s IPC index was up 140 points, or 0.6%, to 22,329 at about 11:10 a.m. PDT. It has rebounded 32% since March 2.

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But the Mexican market still is slightly in the red year-to-date, off 0.2%. By contrast, other Latin American markets are sharply higher. Brazil is up 23%, Argentina has rallied 17% and Chile is up 12.5%.

-- Tom Petruno

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