By Jason Lange
MEXICO CITY, Feb 20 (Reuters) - Mexico's economy contracted late last year as the U.S. recession tore into demand for exports, data showed on Friday, and the central bank disappointed investors by cutting interest rates less than expected.
The peso fell sharply following the rate decision and on comments by the central bank that it was worried about a tumble in the currency, which has lost about 30 percent of its value since last August due to the world economic crisis.
The economy shrank at a 1.6 percent annual clip in the fourth quarter, meaning Mexico is firmly on the path toward recession. The government expects the economy will also contract during the first and second quarters of this year, and some private sector analysts are more pessimistic.
The U.S. recession, triggered by a collapse in the American housing market, has choked off orders for everything from cars to refrigerators made in Mexico.
Mexico's central bank cut its key interest rate by 25 basis points to 7.50 percent to try to soften the blow of an economic downturn unseen in the country since the Tequila Crisis of the mid-1990s.
Most analysts expected a 50 basis point reduction.
The bank warned it was increasingly concerned about the recent deterioration of the peso which could fuel inflation.
'Strong financial turbulence seen recently represents a risk for inflation expectations,' the bank said in its monthly statement.
Markets jumped on that comment, as well as the size of the rate cut which was seen as timid, sending the peso downward.
'It has raised the specter in the market of whether they are trying to defend a range. That is very dangerous because it invites attacks,' said Morgan Stanley economist Gray Newman.
The peso's depreciation prompted the bank to sell dollars directly to dealers again on Friday to prop up the currency. It was the latest of a series of measures to defend the peso that have had little success.
'The central bank is contributing to the very volatility that they are trying to avoid,' Newman said.
Mexico's currency was down 1.22 percent to 14.80 per dollar on Friday afternoon.
A weak currency means many imports will become more expensive, raising fears of an inflation bump.
Mexico's economy grew a tepid 1.3 percent in 2008, slowing sharply at the end of the year.
The central bank eased monetary policy last month for the first time in nearly three years, cutting its benchmark rate by 50 basis points. Investors see it trimming its key rate to as low as 6.0 percent this year to boost growth.
(Additional reporting by Noel Randewich, Luis Rojas Mena and Michael O'Boyle; Editing by Diane Craft) Keywords: MEXICO ECONOMY/ (jason.lange@thomsonreuters.com; +52 55 5282 7151; Reuters Messaging: jason.lange.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
MEXICO CITY, Feb 20 (Reuters) - Mexico's economy contracted late last year as the U.S. recession tore into demand for exports, data showed on Friday, and the central bank disappointed investors by cutting interest rates less than expected.
The peso fell sharply following the rate decision and on comments by the central bank that it was worried about a tumble in the currency, which has lost about 30 percent of its value since last August due to the world economic crisis.
The economy shrank at a 1.6 percent annual clip in the fourth quarter, meaning Mexico is firmly on the path toward recession. The government expects the economy will also contract during the first and second quarters of this year, and some private sector analysts are more pessimistic.
The U.S. recession, triggered by a collapse in the American housing market, has choked off orders for everything from cars to refrigerators made in Mexico.
Mexico's central bank cut its key interest rate by 25 basis points to 7.50 percent to try to soften the blow of an economic downturn unseen in the country since the Tequila Crisis of the mid-1990s.
Most analysts expected a 50 basis point reduction.
The bank warned it was increasingly concerned about the recent deterioration of the peso which could fuel inflation.
'Strong financial turbulence seen recently represents a risk for inflation expectations,' the bank said in its monthly statement.
Markets jumped on that comment, as well as the size of the rate cut which was seen as timid, sending the peso downward.
'It has raised the specter in the market of whether they are trying to defend a range. That is very dangerous because it invites attacks,' said Morgan Stanley economist Gray Newman.
The peso's depreciation prompted the bank to sell dollars directly to dealers again on Friday to prop up the currency. It was the latest of a series of measures to defend the peso that have had little success.
'The central bank is contributing to the very volatility that they are trying to avoid,' Newman said.
Mexico's currency was down 1.22 percent to 14.80 per dollar on Friday afternoon.
A weak currency means many imports will become more expensive, raising fears of an inflation bump.
Mexico's economy grew a tepid 1.3 percent in 2008, slowing sharply at the end of the year.
The central bank eased monetary policy last month for the first time in nearly three years, cutting its benchmark rate by 50 basis points. Investors see it trimming its key rate to as low as 6.0 percent this year to boost growth.
(Additional reporting by Noel Randewich, Luis Rojas Mena and Michael O'Boyle; Editing by Diane Craft) Keywords: MEXICO ECONOMY/ (jason.lange@thomsonreuters.com; +52 55 5282 7151; Reuters Messaging: jason.lange.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.