Bloomberg News

Mexico Keeps Key Rate Unchanged as Economic Outlook Worsens

June 08, 2012

Mexico’s central bank kept its benchmark interest rate unchanged for the 27th straight meeting as a weaker global economic outlook led it to downplay the risks to inflation.

The bank’s board, led by Governor Agustin Carstens, left the overnight lending rate at 4.5 percent today, matching the forecast of all 18 economists surveyed by Bloomberg.

“We consider that the balance of risks to growth of the Mexican economy has deteriorated, reflecting the intensification of the downside risks to the global economy,” the bank said in a statement accompanying the decision. “The balance of inflation risks remains unchanged.”

Mexico’s annual inflation rate rose for the first time in four months in May as growth quickened and the peso weakened 9.5 percent in the month, the worst performance of the major currencies tracked by Bloomberg. At the same time, signs of slowing growth in the U.S., the destination for 80 percent of the goods Mexico’s ships abroad, raised concern that demand for exports from Latin America’s second-biggest economy may decline.

“The central bank clearly depicts an outlook that will allow it to keep rates on hold for a long time,” said Gabriel Casillas, chief economist and research head at Grupo Financiero Banorte in Mexico City.

Still, today’s statement appeared less dovish because it did not include a reference to international factors contributing to a possible rate cut that had appeared in previous reports, Casillas said.

Inflation Risks

Downside inflation risks “have risen as a result of the recent decrease in global commodities prices and an increased probability that external and internal demand will weaken,” the central bank said.

The comments come a day after the statistics agency reported that annual inflation accelerated to 3.85 percent in May from 3.41 percent the month before, the biggest pick-up since January 2010. Core inflation, which excludes food and energy, accelerated to 3.48 percent, the fastest pace since December 2010.

“We’re starting to see signs of demand-driven inflation,” Roberto Ivan Garcia Castellanos, a fixed-income trader at Casa de Bolsa Finamex SAB, said in a telephone interview from Guadalajara, Mexico, yesterday. “We still don’t even know what effect such a weak exchange rate will have.”

While policy makers said they cannot rule out risks to inflation from the peso’s recent slump, the so-called currency pass-through to prices has been low, according to today’s statement.

Peso Weakness

Mexico’s peso strengthened 0.5 percent to 13.9979 per dollar at 11:34 a.m. in Mexico City.

The currency’s plunge has bond traders betting the slump will drive up the cost of imports, fueling a pickup in inflation.

The yield gap between fixed-rate notes due in 2013 and similar-maturity inflation-linked bonds, a gauge of investors’ expectations for annual price increases, swelled 86 basis points in the month through yesterday to a 10-month high of 4.26 percentage points.

The peso will rebound once volatility subsides in global financial markets, Finance Minister Jose Antonio Meade said June 5. Inflation expectations are “well-anchored,” he said.

Economists expect Mexico’s central bank to keep the overnight lending rate at a record low of 4.5 percent this year, according to a June 4 survey of analysts by Citigroup Inc.’s Banamex.

The poll estimated inflation in the next 12 months at 3.92 percent, up from 3.87 percent in the previous bi-weekly survey. The target range for inflation is 3 percent, plus or minus one percentage point.

Economic Growth

Banco de Mexico on May 16 said the country’s economy may expand as much as 4.25 percent this year, compared with 3.9 percent in 2011. The bank previously forecast growth of as much as 4 percent. The economy grew 4.6 percent in the first quarter.

Since the bank raised its 2012 growth forecast, Europe’s debt crisis has deepened and U.S. jobs reports suggest that the labor market in the world’s largest economy has stalled.

U.S. payrolls climbed by 69,000 last month, the Labor Department reported June 1 in Washington. That was less than the most-pessimistic forecast compiled by Bloomberg and marked the third straight month of less-than-forecast job growth.

Federal Reserve Chairman Ben S. Bernanke yesterday told a Congressional committee that policy makers this month will discuss whether to do more to spur growth, though he said the steps they could take may have “diminishing returns.”

Mexican policy makers may still cut rates, Alberto Ramos, a senior Latin America economist at Goldman Sachs Group Inc., said in a note to clients today.

“A rate cut down the road seems more probable than a rate hike, particularly if the U.S. and other core central banks embark on a new round of monetary accommodation,” Ramos said.

To contact the reporter on this story: Nacha Cattan in Mexico City at

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

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