Bloomberg News

Mexico Maintains Key Rate Amid Forecasts Inflation Will Slow

July 20, 2012

Mexico’s central bank left its key interest rate unchanged at a record low, stretching the period since its last move to three years, on forecasts the inflation rate will drop back into the target range by year end.

The bank’s board, led by Governor Agustin Carstens, kept the overnight lending rate at 4.5 percent today, matching the forecast of all 21 economists surveyed by Bloomberg. The bank hasn’t changed the rate since before Carstens took the helm in January 2010 and will stay on hold until the third quarter of next year, according to a separate survey by Bloomberg.

Mexico’s inflation rate surged to an 18-month high of 4.34 percent in June after economic growth accelerated and a lingering drought in some parts of the country put pressure on food prices. The central bank targets inflation of 2 percent to 4 percent. Policy makers said today that the medium-term risks for inflation have abated based on the increased chances for a “severe weakening” in the global economy.

“It’s true that in the short-term the outlook for inflation has deteriorated,” Alberto Ramos, an economist at Goldman Sachs Group Inc. in New York, said in an interview. “It’s also true that in the medium-term it has actually improved. If you calibrate monetary policy looking more at the medium term, rather than the immediate term, this is a dovish sign.”

On Hold

Mexico’s economic activity has shown a positive trend, although the growth outlook has deteriorated, the central bank said.

The yield on Mexican local-currency bonds due in 2024 fell 13 basis points, or 0.13 percentage point, to 5.10 percent, the lowest level since the securities began trading in 2005, according to data compiled by Bloomberg. The price increased 1.54 centavos to 144.95 centavos per peso.

The peso lost 1 percent today to 13.3620 per dollar.

Mexico’s central bank has kept monetary policy on hold since July 2009, or for 28 straight meetings, after cutting the rate seven times that year to spur growth amid the worst recession since the so-called Tequila Crisis in 1995. By contrast, the central bank in Brazil, Latin America’s only larger economy, has adjusted its Selic rate 17 times in the past three years.

The central bank’s board noted that due to lower inflation in advanced and “a large number of developing nations there has been a relaxation of the monetary stance.”

“It’s probable that several of these economies will adopt more accommodative monetary stances in the following months, leading them to an unprecedented level of laxity,” the board said.

‘Trigger’

Ramos said that trend “could eventually be a trigger for monetary easing in Mexico, even though they don’t say it explicitly.”

Mexico’s economy grew 4.6 percent in the first three months of 2012, the fastest pace in six quarters, and is set to outpace Brazil for a second year, according to the median forecasts of economists surveyed by Bloomberg.

At 4.5 percent, Mexico’s central bank rate is the lowest since Carstens’ predecessor, Guillermo Ortiz, began targeting the overnight lending rate in 2005. Previously, Banco de Mexico implemented monetary policy by targeting the money supply.

Mexico’s rate compares with less than 1 percent in the U.S. and Europe. Brazil last week cut its Selic rate to a record low 8 percent to boost its stalling economy as indebted consumers facing a tougher job market cut back on spending.

Shares, Currency

Mexico’s IPC stock index has climbed 59 percent since the central bank last adjusted rates, compared with a 4.4 percent gain for Brazil’s Bovespa index and more than benchmark equity measures in Peru, Argentina, Colombia and Chile.

The peso weakened 0.2 percent against the dollar in the past three years, compared with a 4.9 percent drop in Brazil’s real.

Even as Europe’s debt crisis has damped global demand, Mexico’s economy is showing signs of resilience.

Car exports and production rose to records during the first half, the Mexican Automobile Industry Association said. Retail sales climbed 5.2 percent in May, compared with the 4.8 percent median forecast of analysts in a Bloomberg survey.

Bird Flu

Demand from the U.S., Mexico’s largest trading partner and the buyer of 80 percent of the nation’s exports, has helped bolster the Mexican economy. Cemex SAB, the largest cement maker in the Americas, said today that its second-quarter loss narrowed, spurring a 5.9 percent rally in the Monterrey-based company’s stock.

Carstens said in a July 4 interview that a neutral monetary stance is “adequate” and that inflation will “very likely” slow to within the target range this quarter.

Still, a continued drought in some parts of the country and an outbreak of bird flu may prevent the inflation rate from dropping within target until the fourth quarter, said Miguel Messmacher, the Finance Ministry’s top economist.

“It looks complicated,” Messmacher said in a July 10 interview, partly because the bird flu outbreak in western Mexico is pressuring egg prices. Carstens said in his interview that the effects from the bird flu won’t last.

Economists raised their year-end inflation forecast to 3.94 percent from 3.81 percent in a July 19 bi-weekly survey from Citigroup Inc. (C:US)’s Banamex unit.

Peso Strength

Since declining to 14.3755 per dollar on May 31, its weakest since March 2009, the peso has climbed 7.6 percent, the most among 16 major currencies tracked by Bloomberg. The peso reached 13.1579 per dollar on July 17, its strongest level in more than two months, following European efforts to resolve the debt crisis and Enrique Pena Nieto’s victory in Mexico’s presidential election.

The incoming president, from the Institutional Revolutionary Party, has pledged to overhaul the tax and labor code and open the state-run oil industry. Allowing more private investment in the energy industry may boost GDP by as much as 0.8 percent a year, according to research firm Capital Economics.

Yields on Mexican interbank rate futures contracts due in December, known as TIIE, dropped three basis points yesterday to 4.75 percent, indicating traders expect the central bank to stay on hold for the rest of the year.

“Even after three years of no changes in the fondeo rate, we continue to expect Banxico to remain on hold,” Banco Santander SA (SAN) economist Gabriel Lozano wrote in a July 19 research note. “We expect supply shocks to continue to add upward pressure to consumer prices, but demand-side pressures remain absent.”

To contact the reporter on this story: Nacha Cattan in Mexico City at ncattan@bloomberg.net; Eric Martin in Mexico City at emartin21@bloomberg.net

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


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