Mexico central bank cuts reference interest rate by 0.25 pct to 4.50 pct

By E. Eduardo Castillo, AP
Friday, July 17, 2009

Mexico central bank cuts reference rate 0.25 pct

MEXICO CITY — Mexico’s central bank cut its benchmark interest rate by a quarter percentage point Friday, dropping the interbank rate to 4.50 percent to stimulate a recession-dogged economy.

The peso strengthened after the announcement, trading early Friday at 13.4 to the dollar compared to 13.6 on Thursday.

The move reflects a mixture of improved predictions for Mexico’s second-quarter performance and continued concerns over the strength of the U.S. economy.

Although the downturn in first-quarter economic activity “has been extremely severe,” the central bank said the rate cut — the seventh this year — would be its last for some time.

Mexico’s economy contracted by 8.2 percent in the first quarter, prompting the government to officially declare Mexico’s worst recession since the so-called Tequila Crisis of 1995.

The bank Friday forecast a slow recovery, citing the continuing downturn in the United States. Mexico sends 80 percent of its exports to the United States.

But economic activity should pick up in the second half of the year, the bank said.

Treasury Secretary Agustin Carstens expects the swine flu outbreak to shave between 0.3 and 0.5 percent off gross domestic product, roughly $2.2 billion, leaving the country with a 5.5 percent contraction this year. The epidemic hurt tourism, the country’s third largest source of legal foreign income.

Mexico has struggled to jump-start its economy while controlling inflation, hovering at 5.74 percent.

The battered peso has made imports more expensive, helping to fuel price gains despite slowing growth.

By making access to credit easier, interest rate cuts are intended to stimulate investment and consumption, but also run the risk of increasing inflation.

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