Mexico Price Increase at 11-Month Low Supports Rate Cut View

Mexican consumer prices rose by the least in 11 months as Grupo Financiero Banorte SAB and UBS AG joined traders in forecasting the central bank will cut the key interest rate again this year.

Prices climbed 0.07 percent in April, the national statistics agency said today, lifting annual inflation to 4.65 percent from 4.25 percent in March. The median estimate of 19 analysts surveyed by Bloomberg was for prices to rise 0.09 percent. Core prices, which exclude energy and agriculture costs, rose 0.08 percent, compared with the 0.10 percent forecast by 17 economists surveyed by Bloomberg.

The central bank forecasts that annual inflation will slow back to within the 2 percent to 4 percent target range in the second half of the year. The bank’s Governor Agustin Carstens said yesterday lax monetary policies in developed nations and slowing inflation will weigh on future rate decisions.

“Today’s number confirms our view that Banxico will cut in July,” Alejandro Cervantes, an economist at Banorte, said in a telephone interview from Mexico City. “After May it’s very probable that annual inflation will return to its downward trend.”

Policy makers cut the key rate for the first time in almost four years in March, reducing it by half a point to 4 percent, before leaving it unchanged on April 26.

Swap Rates

Yields on six-month swaps tied to the interbank rate fell 0.06 percentage point to 4.15 percent at 10:54 a.m. in Mexico City, extending their drop since the day of the rate cut to 0.23 percentage point. The swaps indicate that traders are pricing in about a 75 percent chance that policy makers will reduce rates over the next six months.

Carstens told Radio Formula on April 29 that policy makers may consider reducing borrowing costs if the annual inflation rate falls below 4 percent. Three days later he said he hadn’t intended to signal a future rate decision.

Banorte expects Banxico to reduce the benchmark rate by half a point to 3.5 percent in July after the central bank said in its quarterly report that faster inflation will be temporary and growth may slow, according to a report e-mailed today. UBS AG said on May 7 that Banxico will cut rates 50 basis points in the second half, predicting a 25 basis-point cut at the bank’s July and September meetings. Both banks had previously predicted the central bank would keep rates on hold this year.

Capital Inflows

Yields on inflation-linked bonds maturing in December 2013 fell three basis points to 1.62 percent. The peso was little changed at 11.9777 per U.S. dollar and has appreciated 7.3 percent this year, the most of 16 major currencies tracked by Bloomberg.

Mexico has attracted capital inflows, spurring the peso rally, as central banks in Australia, the euro region and Poland cut their key rates to record lows in the past week.

Monetary policy abroad “is a factor, among many, that this board will consider,” Carstens said yesterday at a presentation of the bank’s quarterly inflation report. “It’s a very important phenomenon, but we can’t in any way say that it’s the only factor that intervenes in our decisions.”

Enrique Alvarez, head of Latin America for fixed income research company IdeaGlobal, said Mexico will probably reduce interest rates once inflation begins to abate later this year.

“Carstens will make good on what he’s telegraphed over the last few weeks, that they’ve got to get over the hump of higher year-over-year inflation readings and, beyond that, the coast probably clears for them to lower rates again,” Alvarez said in a telephone interview from New York.

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

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

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