• Economy contracted 0.2% in second quarter from start of year
  • Policy makers raised key interest rate to 4.25% in late June

Mexico’s central bank cut its 2016 growth forecast for a fourth time as exports slowed, saying a difficult global environment is holding back Latin America’s second-largest economy.

The bank reduced its estimate to 1.7 percent to 2.5 percent, compared with a previous forecast of 2 percent to 3 percent. The board also cut its 2017 GDP estimate to 2 percent to 3 percent from 2.3 percent to 3.3 percent. Inflation will end 2016 near its target of 3 percent, they said.

Banco de Mexico kept its key interest rate unchanged at 4.25 percent on Aug. 11, saying that a half point increase in borrowing costs in June is helping to curb inflation risks. Consumer price increases have remained below the central bank’s 3 percent target for more than a year even as the peso fell to a record low triggered by the U.K. vote to leave the European Union. While the currency has depreciated the most among major currencies tracked by Bloomberg after the British Pound in the last 12 months, exports have not benefited as much as expected, and their lag has hurt growth.

Exports have been "much weaker than expected given the depreciation of the exchange rate," central bank Governor Agustin Carstens said at the bank on Wednesday in his presentation on the quarterly report. "Oil exports have been very depressed."

The Finance Ministry last week cut its growth forecast for this year for the second time. In minutes of the central bank’s Aug. 11 meeting released last Thursday, policy makers said that the growth outlook has deteriorated after the economy contracted in the second quarter from the start of the year.

While deputy Finance Minster Fernando Aportela said the contraction in the second quarter was probably due in part to difficulty estimating the seasonal effect of the Easter Holiday, Mexico has been hit by a slump in exports to the U.S., as well as falling oil prices and production that forced the government to cut spending. A slower expansion in domestic demand that had been the main source of growth for previous quarters further weighed on the economy.

The peso, which touched a record low 19.5187 per dollar on June 24, has weakened 8.6 percent this year after the Federal Reserve raised its key rate in December, plunging oil prices reduced the revenue available to fund government outlays and global risks increased.

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