Carstens Will Probably Hold Mexico's Rate as U.S. Double Dip Fears Mount

Mexico’s central bank will likely keep its benchmark interest rate unchanged for a 12th straight meeting on concern the U.S. economy’s recovery may falter.

Banco de Mexico’s five-member board, led by Governor Agustin Carstens, will keep its overnight rate at 4.5 percent today, according to all 14 economists surveyed by Bloomberg. The bank’s decision is scheduled for 10 a.m. New York time.

Claims for U.S. jobless benefits last week jumped to the highest level since November, raising the risk that consumer spending and growth in the world’s biggest economy may weaken further. The prospect of a decline in demand from the U.S., which accounts for 80 percent of Mexico’s exports, may lead Carstens to pause until the middle of next year, said Win Thin, senior currency strategist at Brown Brothers Harriman.

The U.S. Federal Reserve “is so worried about the U.S. economy that it can’t even think about hiking rates until 2011 - - and some people are saying 2012,” Thin said from New York. “Mexico’s in the same boat.”

The recovery in Mexico’s $1.09 trillion economy lags regional peers, which will prompt the peso to continue underperforming, Thin said. This month, the peso has fallen 0.5 percent, making it the worst performer of the six Latin American currencies tracked by Bloomberg.

The yield on Mexico’s 10 percent peso bond due in 2024 fell 5 basis points yesterday to 6.5 percent, according to Banco Santander SA. The price of the security rose to 132.54 centavos per peso.

U.S. Unemployment

The number of unemployment claims in the U.S. unexpectedly rose by 12,000 to 500,000 in the week ended Aug. 14. The Federal Reserve Bank of Philadelphia’s general economic index also turned negative in August, signaling contraction.

The statement accompanying tomorrow’s rate decision in Mexico will probably acknowledge that recent data from the U.S. suggests a slowdown in that economy, after July’s statement was somewhat optimistic, said Alonso Cervera, a Latin America economist at Credit Suisse Group AG.

“The statement will be more downbeat as the bank talks about growth prospects in the U.S.,” Cervera said in a telephone interview.

Mexico’s consumer prices rose less than economists forecast in July and annual inflation slowed for the fourth straight month amid competition at supermarkets.

Inflation

Consumer prices increased 0.22 percent in July from a month earlier and 3.64 percent from a year earlier as costs fell for eggs, melons and grapes.

Banco de Mexico on July 28 kept its inflation forecasts unchanged through next year, as Carstens said policy makers would wait for more economic data before making any changes to their predictions.

The bank expects annual inflation as high as 5.25 percent this year and as high as 3.25 percent next year. Policy makers target inflation at 3 percent.

Growth in Mexico, Latin America’s second-largest economy, will be 4 percent to 5 percent, the central bank says.

Amid the economic recovery, many of the region’s policy makers have raised borrowing costs. Brazil’s central bank has increased its benchmark rate by 2 percentage points to 10.75 since March, Chile’s central bank has raised the overnight rate by 1.5 percentage point to 2 percent since May and Peruvian policy makers have raised to 2.5 percent from 1.25 percent.

In contrast, Mexico’s central bank will probably keep its benchmark rate unchanged until May 2011, according to the median estimate of analysts in a Aug. 5 survey by Citigroup Inc.’s Banamex unit. If policy makers hold today, it will be the longest pause since 2005.

Pause Coming

Still, other regional central banks may soon pause as the U.S. economic recovery begins to slow, said Gray Newman, chief Latin America economist at Morgan Stanley in New York.

Brazilian central bank President Henrique Meirelles this week said inflation expectations are “around” the target for next year, fueling speculation policy makers will stop raising borrowing costs.

“In countries that had begun to hike, the view is there are probably fewer hikes to come in the near term,” Newman said.

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

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