Bloomberg News

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

October 26, 2012

Mexico’s central bank held its benchmark interest rate at a record low after inflation began to ease amid its longest period above the target range since Governor Agustin Carstens took office.

The bank’s board, led by Carstens since January 2010, left the overnight lending rate at 4.5 percent for the 30th consecutive meeting, as forecast by 21 of 22 analysts surveyed by Bloomberg. One analyst expected a quarter percentage point increase today.

Mexico’s inflation rate fell in the first half of October after rising every month since May, bolstering the central bank’s argument that pressures from a drought and an outbreak of bird flu are temporary. While inflation slowed to 4.64 percent from 4.77 percent in September, it has remained above the 2 percent to 4 percent target range for more than four months, the longest stretch since Oct. 2009.

“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.”

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.

Peso Rally

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 fell 0.1 percent against the dollar yesterday to 13.0092.

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 Growth

“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.

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 quantitative easing may spur economic 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 Aug. 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.

Outlook

“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 any time 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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