The ECB cut the interest rate another 25 basis points today, leaving the rate at 1%. It's the second 25 basis point rate cut in less than five weeks. The first reversed the 25 basis point increase in July under former ECB President Jean-Claude Trichet; it occurred the second day of Mario Draghi's brief tenure as the new head of the ECB.
What does this mean for Mexico?
First, it's a signal of just how fragile the situation in Europe is. The two rate reductions are an abrupt about face of ECB policy and demonstrate that the central bank is much more concerned about a recession than inflation at this point in time. Today's rate cut was accompanied by measures to keep the inter-bank lending market moving, another indication that European banks are facing severe funding pressures. If Europe blows, it will hit growth in Mexico.
Second, the odds that Banxico will reduce the Mexican reference rate in the first quarter of 2012 are substantially higher. Not that a lower interest rate is going to be terribly effective in offsetting the impact of a European crisis...
What does this mean for Mexico?
First, it's a signal of just how fragile the situation in Europe is. The two rate reductions are an abrupt about face of ECB policy and demonstrate that the central bank is much more concerned about a recession than inflation at this point in time. Today's rate cut was accompanied by measures to keep the inter-bank lending market moving, another indication that European banks are facing severe funding pressures. If Europe blows, it will hit growth in Mexico.
Second, the odds that Banxico will reduce the Mexican reference rate in the first quarter of 2012 are substantially higher. Not that a lower interest rate is going to be terribly effective in offsetting the impact of a European crisis...
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