Mexico's central bank cut its benchmark target for the overnight rate by 50 basis points to 3.0 percent, a surprise to financial markets, but is not considering further rate cuts in the immediate future due to the expected recovery of the U.S. economy and its relative monetary stance.
The Bank of Mexico, which cut its rate by 100 basis points in 2013, said the margin of slack in the economy had risen and there were downside risks to economic growth while the risks to higher inflation had eased.
"The weak performance of the economy in the first quarter suggests a more moderate recovery than anticipated for the second quarter," the central bank said, adding that higher exports had not compensated for weak consumption and private investment.
Mexico's Gross Domestic Product expanded by only 0.28 percent in the first quarter of this year from the previous quarter for annual growth of 1.8 percent, below the bank's and economists' expectations.
Although production in April is expected to recovery, the bank said the weak beginning suggests that economic growth in 2014 will be lower than expected just a few weeks ago, with an associated increase in economic slack.
On May 21 the central bank cut its 2014 growth forecast to between 2.3 percent and 3.3 percent from a previous forecast of 3-4 percent. In 2013 Mexico's economy grew by only 1.1 percent, down from 2012's 3.9 percent.
Mexico's headline inflation rate fell to 3.5 percent in April from 3.76 percent in March while the core rate rose to 3.11 percent from 2.89 percent.
The central bank, which targets inflation of 2.0 to 4.0 percent, again said prices showed the impact of one-off factors, including tax changes in late 2013 and early 2014, did not have a general impact on inflation and medium and long-term inflation expectations had remained stable while those for 2014 had declined to below 4.0 percent.
Turning to the world economy, the central bank said growth in the first quarter had slowed and downside risks to growth still prevailed. Central banks in both advanced and emerging economies are therefore expected to continue with an accommodative stance for a prolonged period.
However, conditions in international financial markets have improved, with a decline in risk premiums and lower interest rates.
"While there is still a risk of a resurgence of episodes of volatility in international financial markets, it is estimated that this risk is partially offset by the manifest intention of the major central banks of the developed countries to mitigate volatility," the central bank said.
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