April 29 (Bloomberg) -- Mexico’s central bank said the economy may shrink as much as 4.8 percent in 2009 and as much as 8 percent in the first quarter, lowering previous forecasts as the global financial crisis cuts demand for exports.

Banco de Mexico said in its quarterly report released today that the outbreak of deadly swine flu may affect “levels of productive activity in the second quarter.” The bank also raised its inflation forecasts to as high as 6 percent in the second quarter, 5.25 percent in the third quarter and 4.5 percent in the fourth quarter.

The lower growth forecast coupled with a comment in the report that most of the inflationary effects of a weaker peso may have already materialized indicates that policy makers will continue to lower the benchmark interest rate, said Luis Arcentales, an economist with Morgan Stanley in New York.

“The report has a generally dovish tone,” Arcentales said. “Instead of worrying about recent mixed inflation data, the bank is focusing on the intensifying severity of the recession.”

Ortiz said in a conference call with reporters that the bank is seeing more stable financial markets and “signs of improvement” in the economy, such as a recent rise in the consumer confidence index. The global economic slump may also be reaching bottom, he said.

‘More Favorable’

“It’s too early to be able to say we’re starting a recovery, but at least the general impression is that a floor is being formed,” Ortiz said. “This gives us a more favorable panorama for the second part of the year.”

The bank had said in January it expected the economy to contract between 0.8 percent and 1.8 percent this year. The government said this month it forecasts the economy will shrink 2.8 percent in 2009.

Banco de Mexico previously forecast an inflation rate of no more than 5.75 percent in the second quarter, no more than 5 percent in the third quarter and no more than 4.25 percent in the fourth quarter.

The bank said in the report that it is too early to gauge the effects of the flu on inflation, growth and the exchange rate because the duration and intensity of the outbreak are unknown.

Swine Flu

Ortiz said that while the flu will hurt economic growth, the impact will be small if the outbreak is short-lived. He said recent data from the government about flu cases are “relatively good.”

“There will certainly be a negative impact on economic activity,” Ortiz said about the flu. “If it doesn’t last too long, these effects won’t be too important.”

Mexican authorities yesterday raised the toll of suspected swine flu-related deaths to 159 while revising down the number of confirmed deaths to seven from 20. Officials said the mortality rate has held steady over the past few days.

Ortiz held a news conference on the quarterly report by phone today instead of at the bank as a precaution against the virus.

The bank’s comment that the flu may affect economic activity means the outbreak will probably slow inflation, said Sergio Luna Martinez, head of economic research at Citigroup’s Banamex unit.

“The impact is a reduction of prices and that could create more space for monetary policy,” Luna Martinez said.

To contact the reporter on this story: Jens Erik Gould in Mexico City at jgould9@bloomberg.net.

Last Updated: April 29, 2009 16:37 EDT