Mexico Keeps Overnight Rate at 4.5% Amid Deflation

Mexico’s central bank kept its benchmark interest rate unchanged for an eleventh straight meeting, matching the bank’s longest pause, after consumer prices declined for the past three months.

Banco de Mexico’s five-member board, led by Governor Agustin Carstens, today held its overnight rate at 4.5 percent. The decision matched the forecasts of all 17 economists surveyed by Bloomberg.

Mexico’s central bank remains on hold because Latin America’s second-largest economy is recovering more slowly than regional peers Brazil, Peru and Chile, which have all started raising borrowing costs, said Gabriel Casillas, chief economist at JPMorgan Chase & Co. in Mexico City.

“They’re signaling that they’re comfortably on hold,” Casillas said in a telephone interview. “Banxico doesn’t have a pretext to lower rates or raise them.”

The peso fell 0.8 percent to 12.8708 at 10:27 a.m. New York time. The yield on Mexico’s 10 percent peso bond due 2024 rose four basis points to 6.98 percent, according to Banco Santander SA. The price of the security fell to 127.35 centavos per peso.

Consumer prices in the $1.09 trillion economy fell 0.03 percent in June from a month earlier, led by lower costs for tomatoes, onions and grapes.

Annual Inflation

That pushed the annual inflation rate down to 3.69 percent in June, the lowest reading since December. Annual inflation will end 2010 at 4.66 percent, according to the median estimate in a central bank survey of economists published July 1.

Muted internal demand is keeping prices contained, bringing inflation within the central bank’s target range of 2 percent to 4 percent, according to Sergio Martin, chief economist for Mexico at HSBC Holding Plc. That may lead the bank to keep rates on hold through the end of the year, he said.

“Domestic demand remains weak, and consumer credit is just now starting to open up again,” Martin said.

Still, the bank said in a statement accompanying its decision today that domestic demand is starting to improve.

“Consumption and investment in the private sector continue at relatively low levels, although the trend seems to be showing a favorable change,” the bank said.

Banamex Survey

The central bank will probably keep the overnight rate unchanged until March 2011, when it will increase borrowing costs by a quarter point, according to the median estimate of analysts in a July 6 survey by Citigroup Inc.’s Banamex unit.

The central bank kept borrowing costs unchanged at 7 percent for 11 straight months ending in April 2007.

Investors in Mexico face a “contained risk” that the bank may cut rates in 2010, even as regional peers such as Brazil and Chile started raising, said Alejandro Cuadrado, a Latin America economist at Societe Generale SA in New York.

“The balance of risks in Mexico in the past couple of months has changed significantly because of the good inflation numbers and the increased risks from the U.S.,” Cuadrado said.

Sales at U.S. retailers dropped in June for a second month on consumers’ concern about a lack of jobs and a loss of income, indicating the economic recovery dissipated heading into the second half of 2010. Mexico sells about 80 percent of its exports to the U.S.

Chile’s central bank raised its benchmark rate by a half-point to 1.5 percent at its monthly monetary policy meeting yesterday. Last month, Chile increased its benchmark rate for the first time since 2008.

Brazil’s central bank last month raised the benchmark Selic rate 0.75 percentage point for the second consecutive meeting, to 10.25 percent.

Retail Sales

Mexican retail sales fell 0.1 percent in April from the same month a year earlier, the country’s statistics agency said June 18. The agency will report May retail sales July 21.

By contrast, Chile had year-on-year retail sales gains of 22.4 percent in April and 19.1 percent in May, while Brazil’s retail sales increased 9.1 in April and 10.2 percent in May from the same year-earlier periods.

The central bank estimates Mexico’s economy will grow as much as 5 percent this year after it contracted 6.5 percent in 2009, its biggest slump since 1932.

Mexico’s gross domestic product expanded 4.3 percent in the first quarter from a year earlier.

That compares with Brazil’s 9 percent first-quarter GDP expansion, Peru’s 6 percent growth and a 1 percent increase in Chile, which was ravaged by an 8.8-magnitude earthquake in February.

Bank of America forecasts that Mexico’s GDP will grow 4 percent this year, while Brazil’s will expand 7.3 percent and Peru’s by 6 percent. Chile’s economy will grow 4 percent even as first-quarter growth was hurt by the earthquake.

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