Bloomberg News

Mexico Central Bank’s Minutes Boost Rate Pause Outlook

July 22, 2011

(Updates with analyst comment in fourth, eighth paragraphs.)

July 22 (Bloomberg) -- Mexico’s central bank said weaker demand is causing growth to slow and easing consumer price pressures, cementing expectations it will keep the benchmark lending rate at a record low at least through year-end.

Policy makers said that “even when the risks to lower growth have increased, the balance of inflation risks have improved,” according to the minutes of their July 8 meeting posted on bank’s website today. Mexico’s output gap “continues in negative territory, and is closing at a slower pace than anticipated a few months ago,” they said.

The central bank’s board, led by Governor Agustin Carstens, this month extended its longest-ever pause, keeping the overnight rate at 4.5 percent for a 20th straight meeting. 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, within the bank’s target range of 2 percent to 4 percent.

“The minutes are more dovish than the monetary policy statement,” said Gabriel Casillas, chief Mexico economist at JPMorgan Chase & Co., in a phone interview in Mexico City. “More board members are aligned with the view of a bearish growth outlook and a benign inflation.”

‘No Demand Pressure’

In today’s minutes, the policy makers said there’s still “no demand pressure on the prices of the principal goods or external accounts” of Mexico. Slack remains in labor market, and investment has eased, the bank said.

The central bank expects prices to remain within the target range for the remainder of this year and 2012, according to the minutes. Core inflation, excluding tortillas and tobacco, is below the 3 percent target.

Some board members highlighted the importance of treating inflation in a “symmetrical” fashion, the statement said. That means the monetary authorities should cut the overnight rate when the rise in consumer prices is less than the target.

The comment “could open the door for cuts, but we think this is a non-credible threat,” Casillas said. “It’s going to be really hard to see inflation below the target for the reminder of the year. The comment adds marginally to the dovish tone.”

JPMorgan Forecast

JPMorgan expects inflation to fluctuate between 3.5 percent and 3.7 percent in the second half of this year, and forecasts that the bank will start raising rates after the first half of 2012. The majority of economists covering Mexico expect to see the first rate increase in April next year.

Earlier today, Mexico’s National Statistics Agency reported that consumer prices in the first two weeks of July rose 0.32 percent, the biggest increase since the two weeks ended Dec. 31.

The bank’s board highlighted that global commodity prices have declined in recent weeks, according to the minutes.

“In contrast, there’s still the risk of return of turbulence to the international financial markets with the subsequent effect on the exchange rate,” the statement said.

The bank doesn’t rule out “an increase in some agricultural products with consequential effects on the inflation,” the minutes show.

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, the slowest rate of growth since 2009.

The next monetary policy meeting will be Aug. 26.

The peso dropped 0.4 percent to 11.6321 per U.S. dollar at 2:325 p.m. New York time from 11.5910 yesterday.

--Editors: Harry Maurer, 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

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