Analysts shocked as Mexico’s central bank raises clocks

MEXICO CITY (AP) — Analysts expressed shock Thursday at Mexico’s central bank’s decision to cut interest rates on the same day that official data showed a sharp rise in domestic inflation.

Almost without exception, central banks raise interest rates to raise the price of money and discourage price increases.

But in a decision Thursday, the Bank of Mexico cut interest rates by 0.25 percent to 10.75 percent, even as inflation rose more than one percent to 5.57 percent in July. Inflation has been drifting away from the central bank’s 3 percent target for most of this year.

The bank justified the decision with the risk of lower economic growth and argued that price increases occurred in more volatile sectors such as energy and food.

But core inflation — the less volatile sectors that central banks watch particularly closely for long-term trends — rose 0.3 percent in July to just over 4 percent.

Moody’s Analytics Director Alfredo Coutiño called the decision “surprising” and “completely inconsistent with inflationary conditions,” adding that “the bank took unnecessary risks.”

Coutiño said in the report that the rate cut “has the potential to increase pressure on the peso.”

The Mexican currency has depreciated significantly against the US dollar in recent weeks.

Gabriela Siller, director of economic analysis at local financial group Banco Base, said: “This could turn out to be a political mistake that could damage the reputation of the Bank of Mexico.” / AP