Mexico Leaves Key Rate at Record Low on Economic Outlook

Mexico’s central bank left its key interest rate unchanged at a record low after last month’s surprise cut, saying the economy showed signs of picking up in the second quarter without pressuring inflation.

Banco de Mexico’s board, led by Governor Agustin Carstens, left the overnight rate at 3 percent, a move forecast by all 23 economists surveyed by Bloomberg. The board reduced borrowing costs by half a point in June, surprising all the analysts polled by Bloomberg, in an effort to compensate for weak expansion in Latin America’s second-largest economy.

The bank has cut interest rates four times since March 2013 to add stimulus to an economy where growth missed analyst forecasts in seven of the past eight quarters. While the economy is recovering, the output gap is likely to remain negative until the end of next year, the bank said in a statement accompanying today’s decision.

“The statement met my expectations of no change in the policy rate and the adoption of a neutral bias,” Alonso Cervera, chief Latin America economist at Credit Suisse Group AG, said in an e-mailed response to questions. “The next move is a rate hike, likely in the second half of 2015.”

Banxico said that while it expects a “considerable recovery” in the U.S., slack in the Mexican economy remains more than anticipated a few months ago, domestic spending hasn’t shown a clear recovery and inflation doesn’t face pressures from aggregate demand.

Growth Improvement

Mexico’s peso rose 0.1 percent to 12.9842 per dollar at 9:55 a.m. in Mexico City. The yield on Mexico’s fixed-rate government peso bonds due in 2024 fell 0.01 percentage point to 5.70 percent.

Second-quarter economic data “appears to indicate an improvement in the rhythm of growth with respect to the two previous quarters,” the bank said in today’s statement. “That’s principally the result of greater dynamism in exports, since domestic spending still doesn’t show signs of a clear recovery.”

Exports have rebounded from a drop at the start of the year, and annual inflation last month accelerated to 3.75 percent, the fastest pace since March. Industrial production rose 1.6 percent in May from the year earlier, the second-fastest pace since April of last year, while manufacturing climbed 3.6 percent, the national statistics institute reported today.

Economic Stimulus

President Enrique Pena Nieto has said Mexico needs to expand faster than the 2.6 percent average of the past two decades. He’s pushed through a raft of legislation, from opening the oil industry to more private investment to spurring more competition in banking and telecommunications.

The government also increased spending by 13 percent in the first five months of 2014 from a year earlier and plans to run a budget deficit of 1.5 percent of gross domestic product for the year, the largest gap since 2010. The economy grew 1.1 percent last year, the least since 2009.

Still, higher sales taxes and a new levy on soft drinks at the start of the year crimped private spending and pushed the inflation rate to as high as 4.48 percent in January. Inflation has since slowed as the effect of the new taxes waned.

“With a negative real rate and with early signs of a recovery in manufacturing, there’s no leeway for another rate cut,” Siobhan Morden, the head of Latin America fixed-income strategy at Jefferies Group LLC in New York, said in a phone interview before the decision. “The central bank will stay firmly on the sidelines.”

Export Recovery

Mexico’s exports overall have recovered from a drop at the start of the year, growing at least 4 percent from a year earlier in each month from February through May after dropping 0.9 percent in January. The economy in the U.S. is forecast to have expanded 3.3 percent in the second quarter after shrinking 2.9 percent in the first three months of the year amid harsh winter weather, according to the median projection of economists surveyed by Bloomberg.

While economists surveyed by Bloomberg forecast Mexico will grow 2.8 percent this year, down from 3.4 percent at the start of the year, they expect growth to accelerate to 3.8 percent in 2015, according to the median projection.

The central bank reiterated its forecast for inflation to slow to near 3 percent in January 2015, when helped by gasoline prices that will be pegged to broader inflation rather than raised regularly by the government. The bank targets inflation of 3 percent, plus or minus one percentage point.

Gasoline Prices

The central bank reduced its growth forecast for this year on May 21 to between 2.3 percent and 3.3 percent from a previous estimate of 3 percent to 4 percent after the U.S. economy, the biggest buyer of Mexican exports, stalled in the first quarter. Carstens told reporters on June 19 that the forecast may be reviewed again because first-quarter growth of 1.8 percent was less than expected.

Weak consumer spending has helped drag down growth. Same-store sales at Wal-Mart de Mexico SAB, the nation’s largest retailer, declined 0.7 percent from January through June. For supermarket chains and department stores represented by a trade group called Antad, sales rose 0.2 percent.

Mexico’s auto industry has been one source of strength this year, bolstered by new plants for Nissan Motor Co., Honda Motor Co. and Mazda Motor Corp. Automobile output advanced 7.4 percent to 1.6 million vehicles in the first six months of the year as vehicle exports climbed 9.7 percent. Mexico may build more cars and light trucks than Brazil this year for the first time in more than a decade.

To contact the reporters on this story: Eric Martin in Mexico City at emartin21@bloomberg.net; Brendan Case in Mexico City at bcase4@bloomberg.net

To contact the editors responsible for this story: Philip Sanders at psanders@bloomberg.net; Andre Soliani at asoliani@bloomberg.net

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