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Mexico’s Policy Makers See Inflation Outlook Improving

Mexican policy makers were unanimous in their decision to keep the key interest rate unchanged last month, saying the inflation outlook has begun to improve, the minutes of the meeting released today showed.

The central bank board, led by Governor Agustin Carstens, left the overnight lending rate at 4.5 percent on Nov. 30 for the 31st consecutive meeting. In a statement accompanying the decision, policy makers dropped language they had used in their previous meeting that they may tighten monetary policy “soon” and called a recent slowdown in inflation “noteworthy.”

Mexico’s inflation rate fell more than economists expected in November, dropping to 4.18 percent from 4.60 percent a month earlier as the effects of a bird-flu outbreak on egg and poultry prices eased. While the rate remains above the 2 percent to 4 percent central bank target range, policy makers say they see a clear downward trend and warn that Mexico’s growth outlook has been hurt by U.S. fiscal uncertainty.

“The minutes have a dovish slant,” Fernando Losada, an economist at Deutsche Bank Securities Inc. in New York, said in a telephone interview. “This confirms the view that Banco de Mexico is not in a hurry to increase the benchmark interest rate.”

Below 4 Percent

The minutes reiterated the central bank’s forecast that annual inflation will fall below 4 percent by the end of the year and that the board may consider raising rates if new inflation shocks arise. Most board members said they saw a risk to CPI in the possibility of higher-than-expected prices set by the government. The government decides prices including gasoline and other energy costs.

“Most of the board members considered the balance of risks for inflation have diminished at the margins,” according to the minutes. On the economy, “some members argued that the main risks in that area are associated with the global economic weakness, especially related to the U.S. economy.”

Mexico’s economic growth eased to 3.3 percent in the third quarter from 4.4 percent in the previous three months as U.S. business investment slowed on concern Congress will fail to avoid $600 billion in automatic spending cuts and tax increases in January.

“That’s why manufacturing has been decelerating in the U.S. and Mexico,” Gabriel Casillas, chief economist and head of research at Grupo Financiero Banorte SAB, said in a telephone interview from Mexico City before the report. “We continue to call for an indefinite pause” in the benchmark rate, he said.

Fiscal Restraint

The Finance Ministry forecasts Latin America’s second- biggest economy will grow 3.9 percent this year and 3.5 percent in 2013, while warning a U.S. slowdown poses the biggest risk.

On Dec. 7, President Enrique Pena Nieto’s finance minister, Luis Videgaray, proposed a zero-deficit budget next year by raising revenue to offset a 2.3 percent increase in spending. Congress has a Dec. 31 deadline to decide on the 3.58 trillion peso ($280 billion) spending package. Both houses in congress passed the revenue portion of the budget this week.

A balanced budget, excluding spending on Petroleos Mexicanos, would be the country’s first since 2009, Miguel Messmacher, one of Videgaray’s deputies, said in a Dec. 7 interview.

Forecast Adjustments

Economists have begun lowering their inflation estimates, with Citigroup Inc.’s Banamex unit saying Dec. 10 that prices will rise 3.93 percent this year, down from their previous forecast of 4.10 percent. A bi-weekly Banamex survey published Dec. 4 shows analysts expect the rate to reach 4.07 percent by the end of this month, down from 4.10 percent in the previous poll.

There’s been a “shift in trend” in inflation since September, central bank Deputy Governor Manuel Ramos Francia wrote in a report published on the bank’s website Dec. 10.

While softening its language, the central bank still referred to monetary policy tightening when it held rates steady on Nov. 30.

“If new shocks to inflation emerge, even if they are presumed to be temporary” the board may find it “appropriate” to tighten monetary policy, the bank said.

Yields on Mexican inflation-linked bonds due in 2014 fell three basis points to 1.14 percent at 10:17 a.m. in Mexico City. The peso rose 0.2 percent 12.7717 per U.S. dollar. The currency has strengthened 9.1 percent this year, the best performance among 16 major currencies tracked by Bloomberg.

To contact the reporter on this story: Nacha Cattan in Mexico City at ncattan@bloomberg.net

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

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