Bloomberg News

Mexico Central Bank Unanimous in Rate Hold as GDP Recovers (1)

December 20, 2013

Mexican policy makers were unanimous in their decision to leave the key interest rate unchanged this month, saying Latin America’s second-largest economy is showing signs of an economic rebound.

Banco de Mexico kept the overnight rate unchanged at a record-low 3.5 percent on Dec. 6, as forecast by all 20 economists surveyed by Bloomberg, after reducing it by a quarter point in each of its two previous meetings. Policy makers this month said the economy will strengthen gradually next year and reaffirmed their growth forecast of 3 percent to 4 percent, minutes from the meeting published today showed.

Congress last month approved increased government spending for next year and a budget deficit equal to 1.5 percent of gross domestic product as Mexico seeks to jumpstart an economy that policy makers expect to expand 0.9 percent to 1.4 percent this year, the slowest annual rate since 2009. The minutes support Barclays Plc’s view that rates will remain on hold until 2015 as a recovery won’t pressure consumer prices, said chief Mexico economist Marco Oviedo.

“The economy will grow stronger but not yet to all its potential,” Oviedo said in an e-mailed response to questions. “The balance of risks anticipated by the board suggests growth acceleration with subdued inflation.”

Inflation Outlook

Annual inflation will be about 3.5 percent throughout 2014 before easing to near the central bank’s 3 percent target in 2015, most policy makers said in the minutes. The majority of members said peso weakness, spurred by volatility in global financial markets, could spur faster price increases.

The central bank will remain watchful for possible inflation implications from Mexico’s fiscal policy changes and the nation’s monetary posture relative to the U.S., the board said.

“Growth in the Mexican economy is expected to strengthen slowly throughout next year,” the majority of board members said. While downside risks to growth remain in the near term, “there are upside risks for the midterm.”

The U.S. Federal Reserve said on Dec. 18 that it will reduce its monthly asset purchases to $75 billion from $85 billion as the economic outlook improves for Mexico’s biggest export market.

Mexico’s peso was little changed at 12.9688 per dollar at 10:35 a.m. in Mexico City, and has lost 0.6 percent this week.

Output Gap

In the statement that accompanied its decision on Dec. 6, board members said that while internal demand is giving mixed signals, exports are showing greater dynamism. The negative output gap is expected to gradually narrow in 2014, policy makers said in today’s minutes.

“Banxico will remain on hold in the foreseeable future,” Gabriel Lozano, chief Mexico economist at JPMorgan Chase & Co., said in an e-mailed response to questions. “In all, risks seem to be balanced, with inflation expected to remain well behaved on the back of the still significant economic slack.”

The economy rebounded from a second-quarter contraction to expand 0.8 percent in the third quarter from the previous three months, more than the median estimate of economists surveyed by Bloomberg.

Manufacturing production in October increased more than forecast by economists surveyed by Bloomberg, and retail sales fell less than projected.

Economists in a central bank survey published yesterday increased their estimate for growth next year to 3.41 percent from 3.34 percent the month earlier. Still, that’s down from the 3.98 percent growth they forecast in a July survey. Inflation will end this year at 3.82 percent and 2014 at 3.91 percent, according to the median forecast.

Rate Cuts

The central bank, led by Governor Agustin Carstens, cut the overnight rate three times this year by a total of 1 percentage point. The last two quarter-point reductions came as the annual inflation rate slowed for six straight months before picking up in November.

Consumer prices jumped by the most in two years in November as electricity costs surged. Prices climbed 0.93 percent in the month, with electricity costs soaring from October as summer subsidies were removed.

The central bank may raise interest rates toward the end of next year as the inflation rate climbs to near 4 percent, said Alexis Milo, chief Mexico economist at Deutsche Bank AG in Mexico City.

Mexico’s growth will benefit in the medium and long term from the energy industry overhaul passed by Congress this month to end the 75-year state oil monopoly, Milo said.

President Enrique Pena Nieto’s government forecasts the initiative will attract investment and spur production, boosting annual gross domestic product growth by 1 percentage point by 2018. The energy overhaul may lift productivity and investment in Mexico, the central bank said today.

To contact the reporters on this story: Eric Martin in Mexico City at emartin21@bloomberg.net; Nacha Cattan in Mexico City at ncattan@bloomberg.net

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net


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