Bloomberg News

Mexico Holds Rate for 20th Meeting on ‘Favorable’ CPI

July 08, 2011

(Corrects Banco Santander’s Mexico 2011 inflation forecast to 3.4 percent in 11th paragraph.)

July 8 (Bloomberg) -- Mexico’s central bank kept its benchmark interest rate unchanged today, saying that inflation is maintaining a “favorable evolution” and economic expansion has moderated.

The central bank’s board, led by Governor Agustin Carstens, extended its longest-ever pause, keeping the overnight rate at 4.50 percent for a 20th straight meeting. The decision matched the forecast of all 14 economists surveyed by Bloomberg.

The “pace of economic activity appears to have slowed,” while domestic demand has lost some dynamism, the central bank said in the monetary decision statement. “We don’t expect generalized price pressures in the economy,” the bank said.

Core inflation, excluding tortillas and tobacco, is still below the 3 percent target set in January, the bank said.

“It’s expected that during 2011 general and core inflation will continue within the trajectory published in the last inflation report,” policy makers said.

Economic expansion has showed moderation, leading the board of directors to forecast that the output gap will be narrowing at a slower rate than previously forecast.

“The statement came more dovish than expected and it seems the directors are perfectly happy with their positions,” said Sergio Luna, head of economic research at Citigroup Inc.’s Banamex unit in Mexico City.

Banxico, as Mexico’s central bank is known, is saying “the traditional list of domestic risks to inflation is practically clean. The risks could come from international volatility,” Luna said in a telephone interview from Mexico City.

Declining Prices, Forecasts

Consumer prices fell the most in 42 years in May and were unchanged in June, pushing the annual rate down to 3.28 percent last month from 3.36 percent in April, well within the bank’s target range of 2 percent to 4 percent. Against the backdrop of tame inflation, the expansion of the $1.04 trillion economy decelerated to an annual pace of 2.4 percent in April, its slowest growth since 2009.

The performance of Mexican inflation is prompting some banks to adjust their forecasts.

Banco Santander Mexico, the nation’s third-largest lender by outstanding loans, is now expecting inflation will end the year at 3.40 percent compared with a previous forecast of 3.70 percent, senior economist Gabriel Lozano wrote yesterday in a report to clients after the June consumer price report.

“We now expect the central bank to increase its reference rate by 25 basis points preemptively in May 2012, instead of a first hike in January” Lozano wrote.

The June inflation report also led Banamex to reduce its forecast yesterday. General inflation will end the year at 3.6 percent from 3.7 percent as “some economic sectors, like tourism, are unable to pass along price increases to consumers due to a slower demand,” Luna said.

Banamex is keeping to its 4.8 percent estimate for economic growth and a rate increase in January 2012.

“The central bank still has an optimistic inflation appraisal for this year,” said Gabriel Casillas, chief economist at JPMorgan Chase & Co. in a telephone interview from Mexico City. “The board members are quite comfortable with their current monetary stance.”

Mexico economists cut their 2011 inflation forecast for a fourth straight month and reduced their economic growth estimate for the first time this year, according to the central bank’s monthly survey of economists published July 1.

Prices will rise 3.56 percent in 2011, down from a forecast of 3.67 percent in May and 3.87 percent in April, the survey showed. The economy will expand 4.31 percent this year, less than the 4.37 percent expected in May, according to the survey.

Second Half

In the second half of the year “inflation will trend upward for seasonal reasons rather than demand-side pressures, the ones that concern central banks,” Casillas said. JPMorgan sees inflation at 3.5 percent by the end of this year and the economy growing 4.5 percent annually, allowing policy makers to start increasing rates in the first half of 2012.

Industrial production grew 1.4 percent in April from a year earlier -- the slowest expansion since the 0.6 percent increase posted in December 2009 -- from 4.4 percent in March, the nation’s statistics agency reported June 13.

Yields on futures contracts for the 28-day TIIE interbank rate due February 2012 have fallen 20 basis points, or 0.2 percentage point, to 5.04 percent since the bank’s May 27 meeting, indicating traders are betting the bank will wait until that month to raise the key rate.

As recently as April 4, they predicted an increase this month, according to data compiled by Bloomberg.

‘Well Behaved’

“Inflation is very well behaved and the economic recovery is sound, but still slow,” said Zeina Latif, senior economist at RBS Securities in Sao Paulo. “We’re not expecting anything hawkish from the bank for the time being.”

RBS Securities expects the central bank to start raising rates in the first quarter of 2012 as some board members may “want to reinforce the 3 percent inflation target,” Latif said in a telephone interview.

While policy makers in Latin America’s four other major inflation targeting economies -- Brazil, Colombia, Chile and Peru -- have been raising rates in 2011, Mexico has kept borrowing costs unchanged amid slowing growth and inflation.

Mexico’s annual inflation rate is less than half the 6.71 percent recorded in Brazil, the region’s largest economy. Consumer prices in the U.S., which buys about 80 percent of the nation’s exports, rose 3.6 percent in May from a year earlier, the first time since 2007 that inflation in the world’s largest economy was faster than Mexico’s.

The minutes of today’s decision will be published July 22. The next central bank monetary meeting will take place Aug. 26.

Mexico’s peso headed to the first weekly decline in four after the U.S. reported that payrolls rose less than forecast, renewing concern that the world’s largest economy is struggling to recover.

The peso dropped 0.7 percent to 11.6253 per U.S. dollar at 1:56 p.m. New York time.

--Editors: Robert Jameson, Richard Jarvie

To contact the reporter on this story: Jose Enrique Arrioja in Mexico City at

To contact the editor responsible for this story: Joshua Goodman at

Toyota's Hydrogen Man
blog comments powered by Disqus