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Mexico Likely to Keep 4% Rate on Expectations Inflation to Slow

Mexico’s central bank will probably keep borrowing costs at a record low after policy makers said they expect inflation to start slowing back to their target range following a brief surge.

Banco de Mexico will keep the overnight rate at 4 percent today, according to all 19 economists surveyed by Bloomberg. Annual inflation quickened to 4.72 percent in the first half of April, the fastest pace since September, after a frost drove up farm prices. Policy makers target inflation of 3 percent, plus or minus one percentage point.

The central bank, led by Governor Agustin Carstens, lowered its key rate by half a percentage point March 8. The rate cut ended Mexico’s status as the only Group of 20 nation to leave borrowing costs unchanged and refrain from buying bonds to ease monetary conditions since July 2009. The bank said the rate reduction wasn’t the start of an easing cycle, and that it expected inflation to rise in the short-term before reverting toward its target of 3 percent.

“They told us that it was one and done, so there’s no reason to expect they’re going to change their view, especially since headline inflation is only worsening,” Siobhan Morden, the head of Latin America fixed income at Jefferies Group Inc. in New York, said in a telephone interview.

The vote to lower the benchmark rate was the five-member board’s first split decision since it began publishing minutes from monetary policy meetings in February 2011. One board member dissented, saying lower interest rates could threaten the inflation target.

‘Supply Shocks’

Speaking to the Mexican Senate on April 10 in Mexico City, Carstens highlighted policy makers’ success in containing core inflation, which excludes more volatile energy and agricultural prices.

Core inflation fell within the central bank’s target range three months after Carstens became governor in January 2010 and reached 2.88 percent in January, the lowest annual pace in at least 30 years. At an event in Acapulco last night, Carstens said that Mexico shouldn’t underestimate the problem of a potential reversal in capital flows, which could affect financial stability and economic activity.

Annual inflation probably peaked in April and will slow to 3.7 percent in December, and core inflation is likely to remain near 3 percent in coming months, economists including Arturo Vieyra at Citigroup Inc.’s Banamex unit said in an April 24 research note. Banco de Mexico is unlikely to adjust rates, said Marco Oviedo, an economist at Barclays Plc.

“In terms of monetary policy, we do not expect a reaction from the central bank, as the source of the deviation from the target is supply shocks, which are very difficult to control with monetary policy,” Oviedo said in an April 24 note to clients.

‘Compatible’ View

The central bank’s board said in the minutes of its March 8 meeting that the rate reduction “is compatible with an expansion of spending in the economy in keeping with its potential growth and with a convergence of inflation on the 3 percent target.”

Mexico’s economy has continued to show signs of slowing, with retail sales surprising analysts in February by contracting for the second time in three months. Mexico’s gross domestic product will expand 3.5 percent this year, down from 3.9 percent in 2012, according to the median estimate of economists surveyed by Bloomberg. U.S. GDP growth this year will ease to 2 percent from 2.2 percent last year, according to a separate Bloomberg survey.

Mexico’s peso has strengthened since the rate cut and has gained 5.6 percent against the dollar this year, the most among 16 major currencies tracked by Bloomberg, extending last year’s 8.4 percent rally. The peso was little changed at 12.1677 per dollar yesterday.

Rate Forecasts

Yields on government peso debt due 2024 have tumbled 85 basis points, or 0.85 percentage points, this year to a record low 4.57 percent. Mexico’s local-currency notes have returned 16.1 percent in dollars this year, the world’s best performance for government bonds, according to data from Credit Suisse AG.

Mexican economists raised their estimates for year-end inflation to 3.89 percent on April 22 from 3.85 percent two weeks earlier, according to the median estimate in a survey by Citigroup Inc.’s Banamex unit.

Banco de Mexico will keep the 4 percent rate unchanged until January 2015, according to the median estimate in the poll, and their next move is seen as a quarter-point increase.

To contact the reporter on this story: Eric Martin in Mexico City at emartin21@bloomberg.net.

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net

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