Bloomberg News

Mexico Likely to Keep Stable Rate Policy as Inflation Picks Up

July 20, 2012

Mexico’s central bank probably will hold its key interest rate steady today, marking three years since the last change, after policy makers said the economic outlook worsened and inflation rose above the target range.

The bank’s board, led by Governor Agustin Carstens, will leave the overnight lending rate at a record low of 4.5 percent for the 28th consecutive meeting, according to all 20 analysts surveyed by Bloomberg. The decision will be announced at 9 a.m. in Mexico City.

The inflation rate surged to an 18-month high of 4.34 percent in June after economic growth quickened and a drought lingered in some parts of the country, pressuring farm prices. The central bank targets inflation of 2 percent to 4 percent. Still, central bankers downplayed the risks to inflation in their previous decision published June 8, saying that global economic uncertainty has worsened Mexico’s growth outlook.

“The central bank will keep the rate unchanged for a long time,” said Gabriel Casillas, Grupo Financiero Banorte SAB’s chief economist and research head in Mexico City. For now, the stable interest rate policy seems “indefinite,” he said.

Banorte lifted its year-end inflation forecast to 4.2 percent from 3.8 percent on July 16 on higher agricultural and gasoline prices.

Carstens said in a July 4 interview that a neutral monetary stance is “adequate” and that consumer price increases will “very likely” slow to an annual rate below 4 percent this quarter.

Drought

A continued drought in some parts of the country and an outbreak of bird flu may prevent inflation reaching the target range 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 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.

Yields on peso-denominated securities due December 2014 dropped five basis points, or 0.05 percentage point, yesterday to 4.6 percent.

Mexico’s key lending rate compares with less than 1 percent in the U.S. and Europe, while exceeding only Peru’s 4.25 percent among the major Latin American economies.

Economic Growth

Economic growth will probably fall short of the high end of the central bank’s 3.25 percent to 4.25 percent forecast from May, Carstens said on July 4. He said gross domestic product will likely expand 3.5 percent to 4 percent this year.

Even as Europe’s debt crisis has damped global demand, Latin America’s second-biggest economy is showing signs of resilience.

GDP expanded 4.6 percent in the first three months of the year, the fastest in six quarters, and car exports and production rose to records during the first six months, 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.

Since weakening to 14.3755 per dollar on May 31, the peso has climbed 8.7 percent, the most among 16 major currencies, to 13.2242 yesterday, following European efforts to resolve the debt crisis and Mexican presidential elections. Enrique Pena Nieto of the Institutional Revolutionary Party, who has pledged key economic overhauls, won the July 1 vote by a margin of 6.6 percentage points.

Improvement in the U.S. and Europe, combined with Mexican economic expansion, could push the currency to almost 12 per dollar, Carstens said, helping to limit import prices.

“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

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


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