Bloomberg News

Mexico Keeps Key Rate Steady as Inflation Halts 4-Month Rise

October 26, 2012

Mexico Likely to Keep Key Rate at Record Low

Agustin Carstens, governor of the bank of Mexico, attends a seminar at the Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group in Tokyo. Photographer: Tomohiro Ohsumi/Bloomberg

Mexico’s central bank held its benchmark interest rate at a record low after inflation began to ease, while warning that if price pressures persist policy makers could tighten monetary policy “soon.”

The bank’s board, led by Governor Agustin Carstens, left the overnight lending rate at 4.5 percent today for the 30th consecutive meeting, as forecast by 21 of 22 analysts surveyed by Bloomberg. One analyst expected a quarter-point increase.

Short-term inflation risks have increased, even as the outlook for economic growth has deteriorated as the global scenario worsens, the bank said in a statement accompanying the decision. While inflation slowed in the first half of October, bolstering the central bank’s argument that the impact of a drought and an outbreak of bird flu are temporary, it has remained above the 2 percent to 4 percent target range for more than four months.

“The press release definitely has a verbally hawkish tone, but being verbally hawkish doesn’t mean you’re going to hike rates immediately,” said Fernando Losada, an economist at Deutsche Bank Securities Inc. in New York. “The risks are now that the rate hike will happen earlier rather than later, but still our call is that there won’t be any rate changes next year.”

Inflation probably peaked in September at 4.77 percent, the central bank said, before slowing to 4.64 percent on Oct. 15.

Upward Adjustment

“Inflation is expected to keep decreasing in coming months to reach very close to 4 percent toward the end of the year,” the bank said. “If inflation shocks persist, even though they are presumed to be temporary, and the trend in general and core inflation aren’t confirmed, the board thinks that it would be appropriate to carry out an upward adjustment soon in the reference interest rate.”

The only Group of 20 nation to leave borrowing costs unchanged and not step up asset purchases in the past three years will wait until March 2014 to raise rates by a quarter percentage point, according to a Citigroup survey of economists published Oct. 22.

“There will be an indefinite pause in monetary policy,” Delia Paredes, an economist at Grupo Financiero Banorte SAB, said by phone from Mexico City before the decision. “Banxico has said that it wouldn’t act on temporary supply-side pressures.”

Peso Strength

A stronger currency will cut import costs and help ease inflation, Carstens said in an interview with news website 24 Horas this month. The peso has rallied 11 percent against the dollar since June, when speculation grew that the U.S. would take steps to stimulate the economy. The Federal Reserve announced a third round of quantitative easing in September.

The peso was little changed at 13.0166 to the dollar as of 10:24 a.m. in Mexico City.

The risks to global growth also will weigh on any decision to raise rates, said Sergio Luna, chief economist at Citigroup Inc.’s Banamex unit, who expects annual inflation to have peaked last month.

World economic growth is forecast to slow to 2.2 percent this year from 2.9 percent last year, according to economists surveyed by Bloomberg.

At its last monetary policy meeting on Sept. 7, the central bank kept the key rate at the lowest level among major rate- setting banks in Latin America after Peru, saying the outlook for growth had deteriorated as U.S. risks increased.

“Risks to global growth are worsening,” Luna said before today’s decision, and forecast U.S. manufacturing expansion will slow to 3.4 percent in 2013 from 4.6 percent this year. “Those effects on Mexico shouldn’t be ignored,” he said.

Global Impact

Mexico’s exports grew 1.8 percent in September from a year earlier, down from growth of 8.7 percent in August, the national statistics agency reported yesterday.

Still, the threat of inflation hasn’t disappeared. Carstens said Oct. 24 that the central bank is “seriously concerned” about inflation and will “ponder with much care” whether monetary policy tools should be used to prevent price fluctuations if they become more widespread.

Traders differ from economists in betting that Carstens will raise rates next year on speculation that the Fed’s quantitative easing may spur growth that fans inflation.

Interbank rate futures show traders expect Carstens to lift rates in December 2013. A month ago, they predicted he would wait until August 2014 to raise them. Yields on the December 2013 contracts have jumped 0.24 percentage point in the past three months to 4.99 percent, indicating there’s a greater than 50 percent chance of a quarter-point increase by then.

Inflation Threat

“Annual inflation won’t come down as quickly as the central bank expects,” said Scotiabank Inverlat SA economist Mario Correa in Mexico City before the report. “If the economy keeps growing and we see a more solid inflation dynamic it may be necessary for a less accommodating monetary policy.”

While Correa sees a rate increase in March next year, Alberto Ramos, an economist at Goldman Sachs Group Inc., doesn’t expect a move in borrowing costs anytime soon.

Carstens is unlikely to raise rates in 2013 as the latest round of asset purchases by the U.S., which buys around 80 percent of Mexico’s exports, fuels a rally in the peso, Ramos said.

“It would be hard to imagine that their main trading partner would continue to accommodate, and in Mexico they’d be hiking rates because of supply shocks,” Ramos said by phone from New York on Oct. 19. “We’ve seen the worst of inflationary pressures in Mexico.”

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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