Mexican Efforts to Slow Credit Crisis

Mexico Leaves Rate at 8.25% Amid Inflation Concerns Bloomberg.com
Brazil Stocks Fall on Lower Growth Prospects; Bolsa Declines Bloomberg.com
Mexico offers 40bln pesos of loans for mortgages Bloomberg.com
Mantiene Banxico en 8.25% tasa de interés interbancaria El Universal
Lanzan Nafin y Bancomext apoyo a Pymes por 35 mil mdp El Universal

The fleeing of investors and the slowing of demand for commodities are ending the rapid economic growth that Latin America has experienced in recent years. The new picture in Latin America is filled with negative or low profit growth in countries such as Brazil and Mexico. As a consequence of the recent stock market plummets, the Amazonian titan has reduced its forecast for economic growth over the next year. Although Latin American policymakers hoped the recent rallies in the markets would serve as a beacon of light to wary investors, the overall commodity price expectations, which are key to Latin American growth, remain very low.

Mexico tries in a desperate move to rescue the peso by tapping more than 10 percent of the central bank’s reserves. The Mexican central bank offered 40 billion pesos (3.1 billion USD) credit to mortgage lenders in a bid to bolster liquidity in the housing market. However, Mexico’s benchmark interest rate remained at 8.25 percent. Mexico’s central bank has held the benchmark interest steady throughout the crisis, because its policymakers fear that a rate cut would further weaken the currency and spur inflation. Inflation has been speculated to stay at 6 percent by the end of the year, which is an increase of 0.6% from its current levels.

On October 13 the Mexico’s central bank also unveiled a plan to provide financing to commercial banks in need of liquidity, which is basically a scaled-down version of the current rescue strategy in the U.S. As in the U.S., some policymakers fear that banks will use this capital infusion to pay debts, rather than using it for its intended purpose – to loosen credit. Critics back up this argument by pointing to the U.S. tax stimulus earlier this year, when millions of Americans received hundreds of dollars in a design to bolster consumer spending. However, many people used the extra funds to pay off debts instead of buying new items, which tampered the intended effects of the stimulus. Finally, some private financial organizations in Mexico, principally Bancomext and Nafin, have been able to inject around 2 billion USD in credit during the last few days in hopes of propelling the small and medium size business activity and stabilizing the employment crisis.

Questions:

1) Would it be better to help spark lending and spending if Mexico's central bank temporarily lowered their benchmark rate or are their over inflation concerns valid?
2) Will any of the money given to banks be translated into consumer credit? Or will the banks simply pay down existing debts? Is there a better way to spark bank lending than giving them cash?