Bloomberg News

Mexico May Keep 4.5% Rate as Peso’s Decline May Fuel Inflation

October 14, 2011

Oct. 14 (Bloomberg) -- Mexico’s central bank may keep its benchmark interest rate unchanged today after the peso’s 11 percent decline last month led economists to reverse calls to stimulate the country’s sagging economy.

The central bank’s board, led by Governor Agustin Carstens, will keep the overnight rate at 4.50 percent for a 22nd straight meeting, according to 13 of 16 economists surveyed by Bloomberg. Three analysts expect a 0.25-point cut. It’s the first time since 2009 that analysts polled by Bloomberg aren’t unanimous in their forecast. The bank announces its decision at 10 a.m. New York time.

Latin America’s second-biggest economy expanded at the slowest pace since 2009 in the second quarter, prompting the government to cut its 2011 growth forecast to 4 percent from 4.3 percent. While policy makers at their last meeting signaled their willingness to cut rates to protect Mexico from a global slowdown, the peso’s decline may lead to pass-through pressures on prices, said Rodolfo Navarrete, head of research at Vector Casa de Bolsa SA.

“When there is a depreciation like the one we are seeing, there is a danger of inflation,” Navarrete said in a phone interview from Mexico City. “The depreciation generates inflation.” He said that in September he reversed his forecast for a rate cut today after the peso began weakening.

The peso’s slump against the dollar can cause inflation to rise by pushing up the cost of imported goods. Investor concern about a possible U.S. recession and a worsening of Europe’s debt crisis helped send the currency to a 29-month low against the dollar last month.

Inflation, Rate Horizon

Since Banco de Mexico last met Aug. 26, the peso fell 7.3 percent against the dollar through yesterday and has weakened for five straight months. Its 20 percent loss in 2008 helped push annual inflation up to a seven-year high of 6.53 percent.

Emerging markets including Brazil on Aug. 31 and Israel on Sept. 26 cut their benchmark interest rate on signs of a slowing global economy. Elsewhere in Latin America, central bankers in Chile, Peru and Colombia have kept monetary policy on hold at recent meetings on global slowdown concerns.

Economists from UBS AG, Barclays Capital and Bank of America predicted that Banco de Mexico will cut the rate to 4.25 percent today.

Domestic Slowdown, U.S.

The Bank of Mexico will lower the interbank rate to 4.25 percent in October 2012, according to the median estimate of 20 economists in an Oct. 4 Banamex survey.

Two of the economists surveyed by Banamex expected a rate cut today and three others forecast a cut at the next meeting in December.

September’s manufacturing index fell to 50.0 from 51.6 in August after rising from 50.6 in July, the Mexican Institute of Finance Executives reported Oct. 3.

The statistics agency on Oct. 12 reported that industrial output fell in August for the fourth month in 2011. From a year earlier, production rose 3.1 percent, which is the third-lowest annual print since 2009.

Economic weakness in the U.S., which buys 80 percent of Mexico’s exports, is taking a toll on Mexico’s growth. According to the government’s estimate released Sept. 8, gross domestic product growth will slow this year from 5.4 percent in 2010, and may decelerate again next year.

Neutral Policy, Peso

Carstens said Sept. 15 at the Bloomberg Markets 50 Summit in New York that the balance of risks in Mexico still calls for a relatively neutral monetary policy, although there may be circumstances in the future that call for lower rates.

At the same time, some economists don’t agree that U.S. and Mexico growth data are positive enough and the peso depreciation drastic enough to delay a rate cut. The peso has strengthened 2.8 percent in October. Carstens said in a Sept. 23 interview that the peso has been “oversold” and that there would be a correction in the next days.

“I think the peso weakness is transitory and the risks that the slowdown is quite marked are high,” said Rafael de la Fuente, a senior economist at UBS in Stamford, Connecticut. De la Fuente said that well-anchored inflation supports his prediction for a rate cut today.

Consumer prices in September rose 3.14 percent from a year earlier, the second slowest pace in five years. The central bank’s annual inflation target is 3 percent, plus or minus one percentage point.

The yield on Mexico’s peso bonds due in 2024 were little changed at 6.529 percent, according Banco Santander SA. The price of the security rose 0.03 centavo to 130.56 centavos per peso.

The peso weakened 1.1 percent to 13.4280 per U.S. dollar yesterday from 13.2874 on Oct. 12.

--With assistance from Jose Enrique Arrioja in Mexico City. Editors: Robert Jameson, Jonathan Roeder

To contact the reporter on this story: Nacha Cattan in Mexico City at ncattan@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net


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