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  • Emerging Markets Debt Daily

    Mexico Matches U.S. Cut

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    August 16, 2019
     

    Mexico’s central bank cut its policy rate, opting to support weakening domestic activity. Turkey’s industrial production weakened more than expected in July, providing more reasons for monetary easing.

    Mexico’s central bank jumped on the rate-cutting bandwagon yesterday, lowering the benchmark rate by 25bps to 8%. The move looked like “conscious recoupling” with the U.S., but the statement indicated that there was no firm commitment yet. Many market participants, however, expect additional policy easing in the coming months—the very high real policy rate looks like an impediment when domestic activity is clearly stalling. Discussions about a possible shift to a dual policy mandate echo this sentiment.

    Turkey’s industrial production disappointed in June, moving further into contraction territory (-3.9% year-on-year). The decline was deeper than expected, raising concerns not just about domestic activity, but also about the budget execution and other sovereign metrics. The release sends a strong signal that the central bank will cut again in the coming months, especially if rising unemployment (which posted the highest rate since 2005 in seasonally-adjusted terms in May) will weigh on consumption.

    Argentina’s downside inflation surprise looks completely irrelevant now, as the currency’s depreciation is likely to push prices higher already next month. Authorities are trying to mitigate the impact on the poor, temporarily removing the value-added tax on some basic foods. But it’s unlikely to do much for President Mauricio Macri’s re-election chances (too little, too late). The focus now shifts to the International Monetary Fund’s (IMF's) visit to Buenos Aires next week—the country has resources to meet its external obligations through the elections, but the new administration would need to have a candid discussion with the IMF about the longer-term outlook.

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