Mexico May Keep Rate at 4.5% to Fuel Consumer Demand After Prices Decline

Mexico’s central bank will probably keep its benchmark interest rate unchanged for an eleventh straight meeting, matching the bank’s longest pause, after consumer prices declined for the past three months.

Banco de Mexico’s five-member board, led by Governor Agustin Carstens, today will keep its overnight rate at 4.5 percent, according to all 17 economists surveyed by Bloomberg. The bank’s decision is scheduled for 10 a.m. New York time.

Mexico’s domestic economy is lagging behind Brazil and Chile as it recovers from last year’s contraction. That has kept a lid on inflation as surging retail sectors elsewhere in Latin America threaten to push up prices, said Douglas Smith, chief economist for the Americas at Standard Chartered Bank.

“Mexico is not seeing any domestically driven demand,” Smith said from New York. “Brazil and Chile have much more domestic consumption and investment at the moment.”

Mexico’s consumer prices rose 3.69 percent in June from a year ago, the lowest reading since December. Annual inflation will end 2010 at 4.66 percent, according to the median estimate in a central bank survey of economists published July 1.

Muted internal demand is keeping prices contained, bringing annual inflation within the central bank’s target range of 2 percent to 4 percent, according to Sergio Martin, chief economist for Mexico at HSBC Holding Plc. That may lead the bank to keep rates on hold through the end of the year, he said.

‘Weak’ Demand

“Domestic demand remains weak, and consumer credit is just now starting to open up again,” Martin said.

The central bank will probably keep the overnight rate unchanged until March 2011, when it will increase borrowing costs by a quarter point, according to the median estimate of analysts in a July 6 survey by Citigroup Inc.’s Banamex unit.

The central bank kept borrowing costs unchanged at 7 percent for 11 straight months ending in April 2007.

“Consumption and private sector investment will continue to lag, even though they’ve recently shown a certain improvement,” the bank’s board wrote in its June statement.

Consumer prices in the $1.09 trillion economy fell 0.03 percent in June from a month earlier, led by lower costs for tomatoes, onions and grapes, the central bank said. Core inflation, which excludes some food and energy prices, was 0.13 percent in June.

Investors in Mexico face a “contained risk” that the bank may cut rates in 2010, even as regional peers such as Brazil and Chile started raising, said Alejandro Cuadrado, a Latin America economist at Societe Generale SA in New York.

U.S. Risks

“The balance of risks in Mexico in the past couple of months has changed significantly because of the good inflation numbers and the increased risks from the U.S.,” Cuadrado said.

Sales at U.S. retailers dropped in June for a second month on consumers’ concern about a lack of jobs and a loss of income, indicating the economic recovery dissipated heading into the second half of 2010. Mexico sells about 80 percent of its exports to the U.S.

ING Groep NV’s Mexican pension fund, the nation’s best performer in the past three years, is buying fixed-rate bonds as it bets that inflation will keep slowing, which may lead the central bank to cut interest rates, according to a Enrique Solorzano, who manages 161 billion pesos ($12.6 billion) at the fund.

Chile’s central bank raised its benchmark rate to 1.5 percent at its monthly monetary policy meeting yesterday. Last month, Chile increased its benchmark rate for the first time since 2008.

Brazil’s central bank last month raised the benchmark Selic rate 0.75 percentage point for the second consecutive mmeeting, to 10.25 percent.

Retail Sales

Mexican retail sales fell 0.1 percent in April from the same month a year earlier, the country’s statistics agency said June 18. The agency will report May retail sales on July 21.

By contrast, Chile had year-on-year retail sales gains of 22.4 percent in April and 19.1 percent in May, while Brazil’s retail sales increased 9.1 in April and 10.2 percent in May from the same year-earlier periods.

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.

Mexico’s gross domestic product expanded 4.3 percent in the first quarter from a year earlier.

Regional Growth

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 an 8.8-magnitude earthquake in February.

Bank of America forecasts that Mexico’s GDP will grow 4 percent this year, while Brazil’s will expand 7.3 percent and Peru’s by 6 percent. Chile’s economy will grow 4 percent even as first-quarter growth was hurt by the earthquake.

Mexico’s peso fell 0.4 percent to 12.7762 per dollar as of 5 p.m. New York time yesterday. It has strengthened 2.5 percent in 2010, the second-best performance against the dollar among the 16 most-traded currencies.

The yield on Mexico’s 10 percent peso bond due in 2024 fell 7 basis points yesterday to 6.94 percent, according to Banco Santander SA. The price of the security rose to 127.8 centavos per peso.

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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