Mexico's central bank cuts rates, eyes Fed swaps

Fri Mar 20, 2009 5:27pm ED
By Jason Lange and Michael O'Boyle
MEXICO CITY, March 20 (Reuters) - Mexico went on the offensive on Friday to counter a sharp economic downturn, slashing interest rates to jump-start growth and pledging to activate a line of credit with the U.S. Federal Reserve.
The central bank lowered its key interest rate by 75 basis points to 6.75 percent, surprising investors who had expected a repeat of a tepid 25-basis-point cut ordered in February.
Mexico's exports have collapsed as U.S. consumers buy fewer cars, televisions and other products made in Mexican factories, which have laid off hundreds of thousands of workers.The bank hopes lower borrowing costs will stem some of the bleeding and reverse the contraction in the economy.
The bank also toned down its concerns about inflation, which is running near a seven-year high, and suggested it was planning more interest-rate cuts.
"The direction is clear" for monetary policy, Central Bank Governor Guillermo Ortiz said in a radio interview from a banking convention in the Mexican resort of Acapulco.
The peso MEX01 strengthened on the rate cut, firming 0.52 percent to 14.1945 per dollar, while the benchmark IPC stock index .MXX fell 1.19 percent as the Federal Reserve's plan to rekindle consumer and small business lending fell short of expectations.
Ortiz said the slowing economy was significantly lowering inflationary pressures.
Mexico's central bank slowed the pace of its rate cuts last month after a 50-basis-point reduction in January as it worried that a steep fall in the peso's value was fueling inflation. The bank repeated those concerns on Friday in its monthly monetary policy statement, but noted market turbulence had eased recently.
"The central bank has woken up to the reality that the economy is so weak that its worries about inflation right now were a mistake," said Pedro Tuesta, an economist at 4Cast consultancy.
Deputy Finance Minister Alejandro Werner said on Thursday that Mexico's economy could shrink as much as 1.9 percent in 2009.