Mexico Keeps Rate at Record Low 4.5% With Inflation in Bank's Target Range

Mexico’s central bank kept its benchmark interest rate unchanged for a tenth straight meeting as policy makers noted that domestic demand has been weak and the peso faced volatility stemming from Europe’s debt crisis.

Banco de Mexico’s board, led by Governor Agustin Carstens, kept its overnight rate at 4.5 percent today, matching the forecasts of all 19 economists surveyed by Bloomberg.

Policy makers will keep rates unchanged for the rest of the year because inflation is under control and Europe’s debt crisis may hurt growth in Mexico if it affects the U.S. economy, which buys about 80 percent of Mexican exports, said Bertrand Delgado, a senior economist at Roubini Global Economics LLC in New York.

“They’re most likely to remain on hold for quite some time,” Delgado said. “Investment and consumption are still sluggish and not picking up as expected. That remains a concern, while inflation remains slowly moving to the target.”

Banco de Mexico will probably keep the overnight rate unchanged until March 2011, when they will raise by a quarter point, according to the median estimate of analysts in a June 7 survey by Citigroup Inc.’s Banamex unit.

“Consumption and investment in the private sector will continue to be delayed, even though recently they’ve showed certain improvement,” the bank said in a statement today. “The uncertainty associated with the European crisis generated greater volatility in the foreign exchange market.”

Peso’s Advance

The peso has begun to “stabilize” in recent days, the bank added.

It rose 0.4 percent to 12.5413 per U.S. dollar at 11:35 a.m. New York time. It has gained 4.4 percent this year, the best performance against the dollar among the 16 most-traded currencies.

Mexico’s economy isn’t growing fast enough to prompt the central bank to begin raising rates as regional peers Brazil, Chile and Peru have this year, said William Landers, who oversees about $8 billion in Latin American stocks at BlackRock Inc.

“Banco de Mexico is very comfortable,” said Landers, who is based in Plainsboro, New Jersey. “The economy isn’t enough to cause them to raise rates.”

The long rate pause comes after Banco de Mexico, in each of the first five monetary policy statements this year, said that the economy was growing below its potential.

Economy

The central bank estimates Mexico’s economy will grow as much as 5 percent this year after it contracted 6.5 percent in 2009, its biggest slump since 1932.

The yield on Mexico’s 10 percent peso bond due in 2024 fell 1 basis point, or 0.01 percentage point, to 7.26 percent today, according to Banco Santander SA. The price of the security was 124.48 centavos per peso.

Mexico’s domestic spending has been outpaced by other Latin American countries such as Brazil and Chile, limiting economic growth and checking inflation, said Neil Shearing, an economist at London-based Capital Economics. Until policy makers see signs of higher consumer demand, it’s “simple and straightforward” for the bank to keep the rates unchanged, he said.

“Inflationary pressures are weak, and consumer spending is still fairly sluggish,” Shearing said. “There’s nothing to keep policy makers up at night.”

Consumer Prices

Consumer prices rose 3.92 percent last month from a year earlier in the $1.09 trillion economy, the first time since December the figure was within the central bank’s target range of 2 percent to 4 percent.

Prices fell 0.63 percent in May from April as electricity costs declined and prices decreased for vegetables and gas used in homes. Annual inflation will end the year at 4.94 percent, according to the median estimate in a central bank survey of 29 analysts published June 1.

“It’s not necessarily true that there’s a common Latin American monetary cycle,” said Sergio Luna, a Mexico City-based economist with Banamex. “That they’ve moved in a homogenous form in the last two or three years had to do with global events.”

Chile’s central bank on June 15 increased its benchmark rate for the first time since 2008, raising it by half a percentage point to 1 percent. Brazil’s central bank last week raised the benchmark Selic rate 0.75 percentage point for the second consecutive time, to 10.25 percent. Peru also raised its benchmark lending rate by a quarter-point to 1.75 percent last week, that bank’s second straight rate increase.

In Chile, retail sales surged 11.9 percent in March and 22.4 percent in April compared with last year. Brazil’s year-on- year retail sales jumped 15.7 percent in March and 9.1 percent in April. Peru doesn’t report retail sales data.

In contrast, Mexican retail sales fell 0.1 percent in April from the same month a year earlier.

Mexico’s gross domestic product expanded 4.3 percent in the first quarter from a year earlier. That compares with Brazil’s 9 percent first-quarter GDP expansion, Peru’s 6 percent growth and a 1 percent increase in Chile, which was ravaged by a February earthquake.

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

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