Bloomberg News

Carstens Says Mexico Inflation to Slow Within Target by Year End

July 26, 2012

Mexican central bank Governor Agustin Carstens said the effects of higher food prices will be temporary and isolated and that inflation will return to the target range by year end.

Consumer-price gains are “under control” and a recent pick-up in the cost of food staples including corn tortillas, eggs and poultry, spurred by a drought and an outbreak of bird flu, will subside within two to three months, Carstens said in a Bloomberg Television interview in London.

Mexico’s stability will enable the nation’s economy to continue outpacing Brazil’s expansion in coming years, said Carstens, who took the helm of the bank in January 2010 and has kept the benchmark rate at 4.5 percent ever since. Economic bills proposed by incoming President Enrique Pena Nieto will also spur growth, Carstens said, without giving details.

“We don’t see a generalized increase in prices,” the bank governor said. “It probably will take us two or three months to go back to our target. It’s a problem strictly of agricultural prices, it’s a temporary issue.”

Mexico’s inflation rate rose to 4.45 percent in the middle of July, the highest level since December 2010 and above the 2 percent to 4 percent target range.

Carstens’s forecast that inflation will slow to below 4 percent by year-end contrasts with his estimate on July 4 that inflation would be within the target range by the end of the third quarter.

Bird Flu

Mexican prices climbed 0.39 percent in the first two weeks of July, the national statistics agency said on its website on July 24. The median estimate of 17 analysts surveyed by Bloomberg was for prices to increase 0.26 percent.

The outbreak of bird flu in the western Mexican state of Jalisco pushed up the cost of eggs 15.8 percent in the first half of July, while the price of chickens gained 3.9 percent.

The cost of corn tortillas, which has the second-biggest weighting among food items in Mexico’s consumer-price index, climbed 1.1 percent last month. Corn prices have soared as the La Nina weather pattern triggered excessive heat and dryness in parts of Brazil, Argentina and Mexico in the beginning of this year, damaging crops.

The worst drought since 1956 in the U.S., the world’s largest corn producer and exporter, has also driven up corn prices.

Carstens said that without the recent pick-up in inflation, his board would consider loosening monetary policy to match central banks around the world. Policy makers in the U.S. have kept the their key rate between zero and 0.25 percent since December 2008 and pledged to keep it “exceptionally low” at least through late 2014. The European Central Bank this month also cut its benchmark rate to a record low 0.75 percent.

“If conditions presented themselves, we would loosen monetary policy, but also at the same time this is a neutral position we have taken - we are prepared to tighten monetary policy if certain events take place,” Carstens said.

To contact the reporters on this story: Karen Eeuwens at keeuwens@bloomberg.net; Maryam Nemazee at mnemazee@bloomberg.net.


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