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Mexico Leaves Rate at 4.5% as Faster Inflation Seen Abating

Mexico’s central bank left its key interest rate unchanged at a record low on forecasts that a jump in consumer prices will slow by year end as a surge in food costs eases.

The bank’s board, led by Governor Agustin Carstens, kept the overnight lending rate at 4.5 percent today for a 29th consecutive meeting, matching the forecast of all 16 economists surveyed by Bloomberg. The only Group of 20 nation to leave borrowing costs unchanged and not step up asset purchases in the past three years will wait until at least 2014 to adjust rates, a separate Bloomberg survey shows.

Mexico’s inflation rate climbed to 4.57 percent in August, a 29-month high, after a drought and bird-flu outbreak pushed up prices of corn, eggs and bread. Inflation has remained above the central bank’s target range of 2 percent to 4 percent for the past three months. While the board said today the effects of bird flu will be temporary and inflation expectations remain anchored, it also said that the acceleration in price increases has been unexpected.

“Going forward, the board will remain alert to developments in all determinants of inflation, since the behavior of these could make an increase in the benchmark interest rate advisable,” the board said in a statement accompanying its decision. “Given the intensity of the shocks that have affected food prices and the persisting potential for greater turbulence in international financial markets, the board considers the risks for short-term inflation continue to rise.”

Neutral Stance

While the central bank expressed concern about inflation, it also said the outlook for growth has deteriorated as U.S. economic risks increased and noted the possibility of further global monetary easing to “unprecedented” levels.

“This is still a neutral statement,” Rafael de la Fuente, senior economist for Latin America at UBS AG, said in a phone interview from Stamford, Connecticut. “It shows the central bank is probably divided on how to deal with the persistence of inflation above target and how to deal with living in an environment where other central banks are easing policy.”

Inflation concerns have been tempered by signs the economy’s strong start to the year is fizzling out, said David Rees, an emerging markets economist at Capital Economics Ltd. in London.

Carstens Forecast

“We think that rates are likely to remain on hold for the foreseeable future, with a strong possibility of cuts next year as the economy slows,” Rees wrote in an e-mail to clients today.

Carstens has forecast that inflation will slow to less than 4 percent by year-end, and last month said the recent jump in food prices alone doesn’t warrant tighter monetary policy.

After rising 4.07 percent in the first half of August, egg prices surged 15.9 percent in the second half of the month, compared with 15.2 percent for all of July, the statistics agency said today. White bread costs increased 3.5 percent last month. Annual core inflation, which excludes food and energy, reached 3.7 percent in the month, the highest since July 2010, according to statistics institute data.

Pablo Cisilino, who oversees $45 billion of emerging-market debt at Stone Harbor Investment Partners, said inflation-linked bonds, known as Udibonos, “offer great value” and will appreciate as food prices climb.

“We have had a massive spike in food prices while energy is also up,” Cisilino said in an e-mailed message.

Udibono Yields

Yields on Udibonos due in 2014 fell two basis points, or 0.02 percentage point, to 0.35 percent at 10:25 a.m. in Mexico City.

Concern that Mexico’s peso would fuel faster inflation has declined after the currency, which tumbled 11 percent in 2011, rallied 7.3 percent this year, the most among 16 major currencies tracked by Bloomberg. The peso today climbed 0.5 percent to 12.9939 per U.S. dollar after earlier reaching 12.9478, the strongest intraday level since May.

“Overall inflation expectations for the medium term remain pretty well anchored,” said Benito Berber, a Latin America strategist at Nomura Holdings Inc., who predicts the central bank will keep rates on hold until the first quarter of 2014. “You just look at the position of foreigners in the Mexican bond market and you see they’re doing something right.”

International investor holdings of Mexican fixed-rate bonds rose to 49.4 percent of the total outstanding on Aug. 8, the most since February 2000, before falling to 49 percent on Aug. 27, according to the most recent data from the central bank.

Expectations Above 4%

While many investors remain confident that the recent rally in inflation is temporary, a Sept. 3 central bank survey showed that analysts expect inflation to end the year above the target range for the first time this year. The median estimate was for prices to rise 4.01 percent, compared with a forecast of 3.91 percent in the previous monthly poll.

Inflation has picked up as Mexico’s economy showed signs of resilience amid an economic recovery in the U.S., the destination for 80 percent of the nation’s exports.

Mexico’s economic growth beat economist forecasts in the second quarter, expanding 0.9 percent from the first three months of 2012, an annualized rate of 3.5 percent, as exports increased 5.8 percent from a year earlier.

Mexico reported July’s preliminary trade deficit at $426.9 million, less than the $1 billion analysts expected. Auto exports reached their highest levels in the first eight months of the year for any January to August period.

The second half of 2012 may see slower expansion, with economists expecting growth to slow to 3.4 percent in both the third and fourth quarters, according to a Bloomberg survey.

To contact the reporters on this story: Nacha Cattan in Mexico City at ncattan@bloomberg.net; Eric Martin in Mexico City at emartin21@bloomberg.net.

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

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