Analysts shocked as Mexico's central bank clocks rise in inflation and cuts interest rates

MEXICO CITY -- Analysts expressed shock Thursday at a decision by Mexico’s central bank to cut interest rates on the same day that official figures showed a sharp rise in domestic inflation. Almost without exception, central banks raise interest rates to make money more expensive, in order to discourage price increases.

But in a decision Thursday, the Bank of Mexico cut interest rates by 0.25% to 10.75%, even though inflation rose by over one percent to 5.57% in July. For most of this year, inflation has been moving further away from the central bank’s objective of 3%.

The bank justified the move, saying there was a risk of lower growth in economic activity, and arguing that prices hikes occurred in more volatile sectors like energy and food.

But underlying inflation — the less volatile sectors that central banks watch especially closely for long-term trends — rose by 0.3% in July to just over 4%.

Moody’s Analytics Director Alfredo Coutiño called the decision "surprising," and "totally inconsistent with inflationary conditions,” adding “the bank has taken an unnecessary risk.”

Coutiño said in a report that the rate cut “has the potential to increase pressures on the peso.” Mexico's currency has suffered a significant drop against the U.S. dollar in recent weeks.

Gabriela Siller, director of economic analysis of the local financial group Banco Base, said “this could prove to be a policy error that could wind up damaging the reputation of the Bank of Mexico.” ___

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