Mexico Central Bank Keeps Rate at 4.5% on Benign Inflation, Slack Demand

Mexico’s central bank extended its longest-ever interest rate pause today as benign inflation gives policy makers room to bolster domestic demand that hasn’t fully recovered from the global financial crisis.

Banco de Mexico’s five-member board, led by Governor Agustin Carstens, kept its benchmark interest rate at 4.5 percent for a thirteenth straight meeting. The decision matched the forecasts of all 15 economists surveyed by Bloomberg.

Domestic demand remains sluggish and while exports continue to rebound, slower U.S. growth may damp sales of Mexico’s goods to the world’s biggest economy, the central bank said in a statement accompanying the decision. The Federal Reserve and the European Central Bank are expected to remain on hold for the foreseeable future, Mexico’s policy makers said.

“Private demand is still falling behind, with investment depressed and consumption still below pre-crisis levels,” the bank said. “Production and manufacturing exports maintain a good rhythm of growth, even as this growth may slow due to expected moderation in U.S. economic activity.”

After today’s report showing that U.S. capital equipment orders rebounded, the peso gained to almost a seven-week high against the dollar, extending the rally that followed the Federal Reserve’s announcement that it’s ready to ease monetary policy further to spur growth.

The peso rose 0.9 percent to 12.5406 at 11:07 a.m. New York time. It has strengthened in the wake of U.S. activity this week, gaining as much as 2 percent in the week to date.

On Hold Until 2011

The central bank won’t raise borrowing costs until September 2011, according to a Sept. 21 survey of economists by Citigroup Inc.’s local Banamex unit. Economists pushed back their forecast from a previous estimate of July 2011.

The current pause is the longest since the bank began targeting the overnight lending rate in 2005.

While domestic consumer demand in Latin America’s second- biggest economy is improving, sluggish investment makes it an inappropriate time to raise borrowing costs, said Bertrand Delgado, an economist at Roubini Global Economics LLC in New York.

“Obviously the domestic economy is bouncing back, but it hasn’t fully recovered from the contraction last year,” Delgado said in a telephone interview. “It continues on a slow recovery.”

The National Bureau of Economic Research on Sept. 20 said the worst U.S. recession since the 1930s ended in June 2009. U.S. retail sales rose in August for the second consecutive month, and the Institute for Supply Management’s factory index rose to a three-month high. Companies in the U.S. added 67,000 jobs last month, more than forecast by economists.

U.S. Economic Data

Even so, the pace of payroll growth in the U.S. is too slow to make up for the loss of more than 8 million jobs caused by the recession or spur the consumer spending that makes up more than 70 percent of the world’s biggest economy.

Favorable domestic data in Mexico has included Finance Minister Ernesto Cordero’s Sept. 20 announcement that the country had recovered all the formal jobs lost during last year’s recession.

The country added 43,296 formal jobs in the first half of September, bringing the total gain for 2010 to 677,373 jobs.

Still, other indicators haven’t been as positive, said Italo Lombardi, an economist at BNP Paribas SA in New York.

Gross fixed investment grew only 0.6 percent in June from a year earlier, lower than the 4.3 percent estimate by 10 economists surveyed by Bloomberg. Retail sales increased less than forecast in July.

Inflation

The bank said in its statement that it expects inflation to remain below its forecasts in the coming quarters even as it quickens toward the end of this year.

Inflation in Mexico has remained within the bank’s forecast in the second and third quarters.

Consumer prices rose 3.68 percent in August compared with a year earlier, a slower rate than the range of 4.75 percent to 5.25 percent forecast by the bank for the third quarter.

In the first half of September, prices rose 0.40 percent while the annual rate was 3.65 percent, the central bank said in a report on its website yesterday.

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.

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

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

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

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