Bloomberg News

Mexico Policy Makers Say Slower Inflation Becoming a Trend

February 01, 2013

Mexican policy makers were unanimous in their decision to keep the benchmark interest rate unchanged two weeks ago, saying slower inflation appears to be gaining traction in the second-largest Latin American economy.

The bank left the rate at a record-low 4.5 percent for a 32nd straight meeting on Jan. 18. Banco de Mexico, led by Governor Agustin Carstens, is the only central bank in the Group of 20 to leave rates unchanged and refrain from purchasing debt to drive down borrowing costs in the past three years.

Banxico said in a statement accompanying its decision that it may lower borrowing costs should inflation continue to slow, leading traders and banks including Credit Suisse Group AG and Deutsche Bank AG to predict a rate cut this year. The annual rate of consumer-price increases dropped more than economists expected to a 15-month low of 3.21 percent in the first half of January after falling within the central bank’s target range in December for the first time since May.

“The downward trend in general and core inflation appears to be confirming itself, based on healthy fundamentals,” according to the minutes of the rate decision published on the central bank’s website today. “If the outlook described is consolidated, a reduction in the benchmark overnight interbank interest rate may be advisable.”

Mexico’s real interest rate, which takes account of inflation, is 0.93 percent, the lowest level of any major rate- setting Latin American nation.

Growth, Inflation

The economy grew 3.3 percent in the third quarter, down from 4.4 percent in the previous three months. Mexico probably expanded 3.8 percent last year, according to the median forecast of analysts surveyed by Bloomberg, after growing 3.9 percent in 2011.

Inflation will accelerate to 3.7 percent by year-end, according to the median estimate in a survey by Citigroup Inc.’s Banamex unit released Jan. 22. Mexico’s central bank targets inflation of 3 percent, plus or minus one percentage point.

While Credit Suisse Group AG expects the central bank to cut rates by 50 to 100 basis points this year and Deutsche Bank says a reduction of 50 basis points is “feasible,” the median economist estimate in Banamex’s survey is for the central bank to leave borrowing costs unchanged until March of next year, when they’ll increase the key rate by 25 basis points.

Inflation Slowdown

“Our central scenario is that there won’t be a cut” this year, Sergio Luna, chief economist at Citigroup Inc.’s Banamex unit, said in a telephone interview from Mexico City before the report. “We don’t see inflation reaching a level that Banxico would need in order to carry out a cut.”

Annual inflation has slowed from a 30-month high of 4.77 percent in September amid an easing in egg and poultry prices that had surged following an outbreak of bird-flu. Reduced fees that America Movil SAB, the wireless provider controlled by billionaire Carlos Slim, charges to connect competitors to its network have also helped curb consumer-price increases.

Core inflation, which excludes energy and food, reached 2.78 percent in the 12 months through mid-January.

Banxico has shifted from its previous statement on Nov. 30, when policy makers said they could raise rates if faster inflation persisted and that the short-term growth outlook had “marginally” worsened on the economic environment in the U.S., the destination of about 80 percent of Mexico’s exports.

To contact the reporters on this story: Nacha Cattan in Mexico City at; Eric Martin in Mexico City at

To contact the editor responsible for this story: Andre Soliani at

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