Mexico Leaves Key Rate Unchanged as Inflation Accelerates

Mexico’s central bank kept borrowing costs unchanged at a record low for a second straight meeting, saying economic growth is picking up and faster inflation will be transitory.

Banco de Mexico left the overnight lending rate at 3.5 percent, as forecast by all 23 economists surveyed by Bloomberg. Annual inflation probably will slow to less than 4 percent in the second quarter and hold just above the 3 percent target next year, the central bank said in the statement accompanying today’s decision.

Policy makers said the economic outlook has improved while analysts forecast a rebound in growth this year amid increased government spending and a recovery in the U.S. A pickup in inflation that pushed the annual rate to the highest in eight months is limited to specific goods and hasn’t spread to the broader economy, policy makers said today.

“The policy statement was a bit less hawkish than I expected,” Alonso Cervera, chief Latin America economist for Credit Suisse Group AG, said in an e-mailed response to questions.

Mexico’s decision to leave rates unchanged bucks a trend of monetary tightening in other developing nations after currencies from Argentina to Russia tumbled this month. India raised interest rates this week along with Turkey and South Africa as emerging-market stocks plunged in their worst start to a year since 2008.

Borrowing Costs

Mexico’s central bank, led by Governor Agustin Carstens, will keep rates unchanged this year, according to the median forecast of analysts polled by Bloomberg, after cutting borrowing costs three times in 2013 by a total of one percentage point to boost growth.

The peso gained 0.2 percent to 13.3363 per U.S. dollar at 11:02 a.m. in Mexico City. Yields on benchmark peso bonds due in 2024 were little changed at 6.65 percent, according to data compiled by Bloomberg.

Traders reduced bets for an interest-rate increase today, with one-year swaps falling to 4.06 percent from 4.11 percent yesterday. The central bank last raised rates in 2008.

The central bank estimates Latin America’s second-biggest economy will grow 3 percent to 4 percent in 2014 after expanding 0.9 percent to 1.4 percent in 2013.

‘Spare Capacity’

“The economy is at the beginning of a recovery,” Rafael de la Fuente, an economist at UBS AG in Stamford, Connecticut, said in an e-mailed response to questions. “This central bank still sees a lot of spare capacity in the economy.”

Consumer prices rose more than expected in early January, pushing annual inflation to the highest since mid-May after taxes aimed at reducing the nation’s dependence on oil revenue were put into place. Soda prices led the jump in inflation as new duties on junk food and higher sales levies in regions bordering the U.S. took effect Jan. 1.

Annual inflation quickened to 4.63 percent in the first half of this month from 4.09 percent in the second half of December. The central bank targets inflation of 3 percent, plus or minus one percentage point.

The tax overhaul probably will boost annual inflation by 0.4 percentage point this year, the central bank said in today’s statement. Grupo Financiero Banorte SAB, Mexico’s third-biggest bank, estimates the increase at 0.55 percentage point.

‘Comfort Zone’

“Inflation has left Banco de Mexico’s comfort zone,” Mario Correa, chief Mexico economist at Bank of Nova Scotia, said in a Jan. 27 telephone interview. “It’s going to take a while for prices to come down and won’t happen until next year.” Correa predicts a quarter-point rate increase in June.

In addition to inflation pressure from higher taxes, Mexico has been dealing with the impact of a weaker currency.

The peso has slumped 3.7 percent since Federal Reserve policy makers said Dec. 18 they will cut monthly bond purchases that have bolstered demand for higher-yielding assets from developing countries. The currency had reached an almost two-year high in May before the Fed signaled that the U.S. could dial back stimulus.

Mexican Finance Minister Luis Videgaray said Jan. 24 there’s no need to intervene to prop up the peso after policy makers in April ended daily central bank dollar auctions.

Inflation should fall back to within the central bank’s target range “after the first months of the year,” Videgaray said.

Until Carstens oversaw the first of 2013’s three rate reductions in March, Mexico had left borrowing costs on hold since July 2009, the longest for any Group of 20 nation.

“Though it’s still early in the year, I feel comfortable with the view that the central bank will be on hold,” Credit Suisse’s Cervera wrote. “Today’s statement supports this view.”

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