Mexico Will Probably Keep Rate at 4.5% on Slower Inflation, Europe Crisis

Mexico’s central bank will probably keep its benchmark interest rate unchanged for a ninth straight meeting as inflation stays under control and policy makers evaluate the fallout from the European debt crisis.

Banco de Mexico’s five-member board, led by Governor Agustin Carstens, will keep its overnight rate at 4.5 percent, according to all 22 economists surveyed by Bloomberg. Given the consensus, investors will focus on the statement accompanying the bank’s decision, scheduled for 10 a.m. New York time today.

The bank may give stronger signals that it will wait to act for the rest of the year. Policy makers will probably note that inflation has slowed to within their estimates while the fiscal crisis in Greece and other European countries is clouding the economic outlook, said Alonso Cervera, a Latin American economist at Credit Suisse Group AG. The bank’s April 16 statement announcing the vote to pause noted that consumer activity and private investment had been weak.

“If last month’s communique was dovish, this one will probably be seen as more dovish,” said Cervera, who changed his forecast this week to say policy makers will hold rates until 2011. “There’s room for the bank to make a stronger case that rate hikes aren’t needed for now.”

The yield on Mexico’s 10 percent peso bond due in 2024 rose two basis points today, or 0.02 percentage point, to 7.79 percent, according to Banco Santander SA. The price of the security fell 0.13 centavo to 119.16 centavos per peso.

The peso fell 0.2 percent to 13.1775 per dollar at 9:35 a.m. New York time. It’s down 0.6 percent in 2010 as Europe’s debt crisis damps appetite for higher-yielding assets.

Greece, Fed

Investors are concerned that Greece’s debt crisis may spread to other European countries such as Spain and Portugal, potentially weakening the euro and damaging the region’s economy.

Policy makers in Brazil and Peru raised interest rates in the past month, as rising domestic demand and recovering commodity exports to Asia in those countries pushes inflation higher.

Mexico, which sends about 80 percent of its exports to the U.S., is unlikely to increase rates before the Federal Reserve, according to Ricardo Aguilar, an economist at Invex Casa de Bolsa in Mexico City.

“We don’t see why Banco de Mexico would separate itself” from the Fed, Aguilar said. “The general level of prices in the economy is contained.”

Federal Reserve officials voted 9-1 last month to retain a pledge to keep the federal funds rate at a record low for an “extended period.” While the labor market is “beginning to improve,” employers are still reluctant to hire, and inflation will remain “subdued for some time,” the Fed said in minutes of its April 27-28 meeting.

Pause

Mexico’s central bank will raise borrowing costs in January 2011, according to the median estimate of analysts in a survey released yesterday by Citigroup Inc.’s Banamex unit. Morgan Stanley, JPMorgan Chase & Co. and Goldman Sachs Group Inc. are among banks that say the first increase won’t come until 2011.

Banco de Mexico cut its benchmark interest rate by 3.75 percentage points last year amid the global financial crisis.

Mexico’s economic rebound is coming “on the back of U.S. manufacturing growth,” said Alejandro Cuadrado, Latin America economist at Societe Generale SA in New York. Domestic sectors such as the service industry continue to lag behind, he said.

“That means the central bank will be looking to continue stimulating the economy, particularly domestically,” Cuadrado said in a telephone interview.

Consumer prices fell more than forecast last month in the $1.09 trillion economy as costs decreased for fruits, vegetables and electricity, pushing the annual rate of inflation to the lowest since December.

Inflation Forecasts

Prices dropped 0.32 percent in April from March, the biggest monthly decline in three years, and increased 4.27 percent from a year earlier, the central bank said May 7.

Banco de Mexico said when it held the benchmark interest rate unchanged last month that inflation will stay in line with forecasts policy makers set in December. It also said that manufacturing exports are increasing “vigorously” due to higher U.S. demand.

The economy is recovering from a 6.5 percent contraction last year, the biggest slump since 1932. Gross domestic product grew 4.3 percent in the first quarter from a year earlier, the most since 2006, statistics agency said yesterday.

The central bank forecasts growth of 4 percent to 5 percent this year.

Mexico’s industrial production rose the most in almost four years in March on surging demand for exports, climbing 7.6 percent from a year earlier, the statistics agency said. Mexican production of cars and light trucks rose 69.6 percent in April from the same month a year earlier, the nation’s Automobile Industry Association said.

To contact the reporter on this story: Jonathan Levin in Mexico City at jlevin20@bloomberg.net; Jens Erik Gould in Mexico City at jgould9@bloomberg.net

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