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Another Emerging Market Banks On Central Bank Help

ETF Professor

The iShares MSCI Mexico ETF (NYSE: EWW) is off nearly 3% amid concerns Latin America's second-largest economy is slowing, but like so many other economies around the world, developed and emerging, the central bank there is ready to act.

What Happened

Banco de Mexico cut rates by 25 basis points to 8% earlier this month for its first rate pare in five years, but at that 8%, there's still plenty of room reductions even as some other Latin American economies balk at the idea of lower borrowing costs.

“With Mexico’s key interest rate at 8%, Banco de Mexico has room to relax monetary policy without completely unwinding its restrictive stance, Jonathan Heath said Tuesday in a presentation in Mexico City,” according to Bloomberg. “Heath was named to the board by leftist President Andres Manuel Lopez Obrador last year.”

Why It's Important

Lopez Obrador, also known as AMLO, swept to power last year on a populist wave, but there has been some buyers' remorse among voters in Mexico as the economy has languished under the new president, putting a burden on the central bank to act quickly to reduce borrowing costs. Fortunately, mild inflation is conducive to more rate cuts, which are expected soon.

“Analysts in a survey published by Citigroup Inc.’s Mexico unit last week expect the five-member board to cut again in its next scheduled decision on Sept. 26,” reports Bloomberg.

EWW and Mexican stocks have also been pinched by trade tensions with the U.S., but those appear to be in the rear view mirror and it's worth nothing the Mexico ETF is heavily domestic in focus. The ETF, which tracks the MSCI Mexico IMI 25/50 Index, allocates more than half its weight to the consumer staples and communication services sectors.

What's Next

Mexico had no economic growth in the second quarter, explaining why stocks there are scuffling and why Banco de Mexico needs to deploy easier monetary policy. The most recent GDP report also showed lower-than-forecast first-quarter and economists there are increasingly concerned Mexico is flirting with a recession.

Over the past 90 days, EWW is down 8.1%, more than quadruple the loss on the MSCI Emerging Markets Index and reflective of investors' concern about the economy there.

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