Sunday, January 20, 2013

Mexican Central Bank Cut Base Rates

Last week's news that the central bank of Mexico reduced base rates by 0.5% was initially seen as a sign of weakness with many experts predicting that investors would flee the country with concerns about the short to medium-term economic outlook. However, the situation could not be any different and the reduction in base rates to 4% has actually reinvigorated investor interest in Mexico and given the government a significant shot in the arm as deadlocked reform discussions continue.

Why did the central bank reduce base rates?

The Mexican economy is still performing relatively well, especially when compared to the rest of the world, but there are many experts who believe it could do an awful lot better. Indeed over the last couple of years the Mexican government has been attempting to combat inflation with relatively high base rates although the average inflation rate has fallen to around 3.7% over the last two years which is a full percentage point lower than the previous two years. As a consequence, the central bank now believes it can take its foot off the brake and breathe new life into the economy.

We must not forget that the Mexican economy grew by 4% in 2012 although there was a significant slowdown in retail spending and industrial production in the fourth quarter of the year. It now seems as though the reduction in base rates, to the lowest level on record, could prompt more significant changes within the Mexican economic framework.

Political deadlock

Political parties are currently at deadlock with regards to potential reforms to the business arena which many experts believe will breathe new life into the economy. The reduction of base rates towards the end of last week was something of a surprise to many people although renewed interest in the economy could prompt the deadlocked talks to move forward.

There is no doubt that Mexico has the potential to be more productive, increase its spread of exports (currently around 80% of Mexican exports go to the US) and while there was a short-term blip in the fourth quarter of 2012, it seems as though the economy may well be back on track. The pressure on the political elite in Mexico is now growing and investors, businesses and consumers are chomping at the bit to play their role in revitalising the economy and pushing it yet further forward.

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