MEXICO CITY –
Analysts expressed shock Thursday at a decision by Mexico’s central bank to cut interest rates on the same day that official figures showed a sharp rise in domestic inflation. Almost without exception, central banks raise interest rates to make money more expensive, in order to discourage price increases.
But in a decision Thursday, the Bank of Mexico cut interest rates by 0.25 per cent to 10.75 per cent, even though inflation rose by over one percent to 5.57 per cent in July. For most of this year, inflation has been moving further away from the central bank’s objective of three per cent.
The bank justified the move, saying there was a risk of lower growth in economic activity, and arguing that prices hikes occurred in more volatile sectors like energy and food.
But underlying inflation — the less volatile sectors that central banks watch especially closely for long-term trends — rose by 0.3 per cent in July to just over four per cent.
Moody’s Analytics Director Alfredo Coutino called the decision “surprising,” and “totally inconsistent with inflationary conditions,” adding “the bank has taken an unnecessary risk.”
Coutino said in a report that the rate cut “has the potential to increase pressures on the peso.” Mexico’s currency has suffered a significant drop against the U.S. dollar in recent weeks.
Gabriela Siller, director of economic analysis of the local financial group Banco Base, said “this could prove to be a policy error that could wind up damaging the reputation of the Bank of Mexico.”
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