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Sunday, June 9, 2013

Mexico Holds Key Rate as Inflation Clashes With Weak Growth

Mexico’s central bank kept its overnight rate at a record low as above-target inflation limits the room to stimulate a slowing economy.


Banco de Mexico maintained the overnight rate at 4 percent today, citing risks that growth will slow further and that the recent volatility in the exchange rate may continue.

The decision forecast by all 26 economists surveyed by Bloomberg, came after the national statistics agency reported today that consumer prices rose 4.63 percent in the year through May.

Analysts surveyed by the central bank are forecasting for the first time that 2013 growth will slow to less than 3 percent after the economy expanded at a slower-than-predicted pace in the first quarter.

At the same time, traders are paring bets the central bank will cut borrowing costs in the second half of the year as consumer price increases linger above the 4 percent upper limit of its target range.

Today’s Banxico statement “weakens my call for a cut,” Benito Berber, a New York-based strategist at Nomura Holdings Inc. who has forecast a half-point reduction in October, said in an e-mailed message. The central bank “sounds slightly more worried on inflation.”

Yields on six-month interest-rate swaps fell one basis point to 4.28 percent at 9:33 a.m. in Mexico City, indicating traders see about a 24 percent chance the bank will lower rates by December. As recently as May 21, the likelihood was about 68 percent.

Alert

The peso strengthened 0.9 percent to 12.6931 per dollar. Yields on Mexico’s fixed-rate benchmark government peso notes due in 2024 fell three basis points to 5.32 percent.

Banxico “will be alert” to the impact monetary policy in other countries may have in the domestic economy and will respond as needed to ensure consumer price increases are in line with target, policy makers said in the statement accompanying the decision.

Credit Suisse Group AG pushed back its rate cut forecast to September from July, saying inflation won’t slow below 4 percent as quickly as the bank had estimated, according to a May 28 research note.

The bank now expects a 25 basis-point reduction in both September and October, instead of its earlier call for a single half-point cut in July.

Consumer prices in May fell 0.33 percent, the first contraction in a year, while annual inflation slowed for the first time in four months, the statistics agency said today.

Cold Weather

In the presentation of the central bank’s quarterly report on May 8, Governor Agustin Carstens forecast inflation will start to slow toward the bank’s target range in June. Prices breached the target in March after cold weather reduced farm production.

Consumer price increases will ease faster starting in July and fall below 4 percent in the third quarter, the central bank said today. The Mexican government cut its growth forecast for the year to 3.1 percent from 3.5 percent on May 17 after expansion slowed to 0.8 percent in the first quarter.

That was less than the 1.1 percent median estimate of economists surveyed by Bloomberg and the least since gross domestic product contracted 6.2 percent in 2009 in the aftermath of Lehman Brothers Holdings Inc.’s collapse.

The peso tumbled 5.3 percent last month as part of a sell-off in developing-nation currencies sparked by speculation the Federal Reserve will roll back asset purchases known as quantitative easing. Fed Chairman Ben S. Bernanke said May 22 the central bank could reduce asset purchases if the U.S. posts a sustained improvement in economic growth.

Slowing Growth

Analysts have cut their forecasts for Mexican growth this year in each of the past four monthly surveys by the central bank, reducing the median estimate to 2.96 percent in its latest poll published June 3 from 3.55 percent in February. Carstens said in a radio interview June 5 that slow growth in Mexico is a “pothole.”

There are “significant reasons for a solid recovery starting in the second half of the year,” including an improving U.S. economy, Carstens told Radio Formula.

The U.S., which buys about 80 percent of Mexico’s exports, grew an annualized 2.4 percent in the first quarter, less than the 3 percent forecast by analysts.

The Fed’s key interest rate of zero to 0.25 percent helped attract record foreign investment into Mexico’s bond market, pushing up the peso and prompting Carstens to warn that a sudden reversal of the inflows could pose a risk to the nation’s financial stability.

Such statements had led economists to forecast Banco de Mexico would cut rates again this year after lowering them half a point on March 8 to head off a sudden flight of capital.

Abrupt Reversal

An abrupt reversal of flows is no longer as much of a concern, according to Carlos Capistran, chief Mexico economist at Bank of America Corp.

“At the current levels, you cannot argue that the exchange rate is too appreciated,” Capistran, who predicts the central bank will leave rates unchanged through year-end, said in a telephone interview from Mexico City before today’s report.

“Therefore, it’s not hurting exports and this means that portfolio inflows are not coming at a rate that is worrisome.”

bloomberg.com

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