Mexico's central bank cut its policy rate by another 25 basis points, its third rate cut this year, but said it was not considering further rate reductions and wanted to ensure that inflation is not affected by changes to taxes and U.S. monetary policy.
The Bank of Mexico, which has now cut rates by 100 basis points this year, said the balance of risks to global economic growth were on the downside and there was an absence of pressure on raw materials so global inflation is expected to remain low.
Mexico's economy slowed sharply in the first quarter and contracted in the second quarter but the central bank said there were signs on "incipient recovery" in the third quarter, showing that some of the adverse impacts from the second half of 2012 were starting to fade.
"While it is anticipated that economic activity will show a recovery in the remainder of this year and next, it is expected that economic growth for 2013 and 2014 is less than the projection published by the Bank of Mexico in its latest inflation report," the central bank said.
The central bank cut its target for the interbank rate to 3.50 percent following cuts in March and September. When the bank cut by 50 basis points in March, it stressed that it was not embarking on a new cycle of policy easing.
"Taking the planned fiscal policy into account, the board believes that the monetary stance is consistent with the efficient convergence of inflation to the target of 3 percent, but that it will not consider any additional reductions in the recommended target for the benchmark interest rate in the forseeable future," the bank said.
In its second quarter inflation report, published in August, the central bank revised down its 2013 Gross Domestic Product forecast to 2.0-3.0 percent from 3.0-4.0 percent in the previous report. In September the central bank also cautioned that growth this year would be less than forecast.
Economists cut their 2013 growth forecasts to 1.3 percent from 2012's 3.8 percent after data showed that Mexico's GDP contracted by 0.74 percent in the second quarter from the first quarter for annual growth of 1.5 percent, up from the first quarter's 0.6 percent.
Given lower-than-expected growth, the central bank said there would be a large degree of slack in the economy for a long period so there are no inflationary pressures expected from the demand side this year and next year. The impact on inflation from tax changes should also be moderate and transitory and not lead to any second-order effects.
Mexico's inflation should converge toward the bank's 3.0 percent goal but the risk is that the economic recovery is slower than anticipated, resulting in downward pressure on inflation. In addition, structural reform could allow for higher growth without inflation.
The upside risks to inflation stem from volatile financial markets with possible changes in the exchange rate, but this should also be a temporary impact.
"It is anticipated that financial markets in the next months will continue to be affected by uncertainty associated with the discussions on the fiscal and monetary policies in the United States," the bank said.
Mexico's inflation rate eased to 3.39 percent in September from 3.46 percent in August.
Like many other emerging market currencies, Mexico's peso currency fell sharply in May following signs that the U.S. Federal Reserve was preparing to reduce its asset purchases, leading to a reversal of capital flows back to advanced economies.
But since June, the peso has been volatile, rising in the last month. After the central bank's meeting, it was trading 12.86 peso to the U.S. dollar, down from 11.99 in early May before it fell, but slightly firmer than 13.01 to the dollar at the end of 2012.
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