Mexico’s central bank kept its benchmark interest rate unchanged at 4.5 percent today, while fueling speculation that it will reduce borrowing costs in the next few months.
Policy makers led by Governor Agustin Carstens signaled they’re ready to lower the overnight rate if monetary conditions remain loose in advanced nations. The decision to keep rates unchanged was forecast by 14 of 17 economists surveyed by Bloomberg. Three analysts expected a quarter-point cut.
The central bank said in a statement that it “will remain alert to global economic growth perspectives and the possible implications for Mexico’s economy, which in the context of extensive monetary easing in the largest industrialized countries, subsequently could make it appropriate to relax monetary policy” in Mexico.
The statement points to the possibility of a rate cut more explicitly than the previous Aug. 26 decision, said Gabriel Casillas, JP Morgan’s chief Mexico economist.
“This statement provides strong support to our call that Banxico will cut rates in December,” Casillas said by phone from Mexico City.
Yields on interest-rate futures contracts for December delivery, known as TIIE, have fallen one basis point to 4.69 percent since the bank’s Aug. 26 meeting, indicating that traders continue to expect Banco de Mexico to cut the benchmark rate on the last month of this year.
The yield on Mexico’s peso bonds due in 2024 fell 12 basis points, or 0.12 percentage point, to 6.41 percent, according Banco Santander SA. The price of the security rose 1.26 centavo to 131.82 centavos per peso at 2:41 p.m. New York time.
The bank indicated that the balance of risks for growth has deteriorated, something it had not mentioned in its last meeting, Casillas said.
Latin America’s second-biggest economy expanded at the slowest pace since 2009 in the second quarter, prompting the government to cut its 2011 growth forecast to 4 percent from 4.3 percent.
The central bank said today that it is watching closely for signs of any “adverse” exchange rate impact after the peso plunged 11 percent against the dollar last month. So far, inflation expectations haven’t budged, it said.
That statement shows that Banco de Mexico isn’t concerned that the recent slump in the peso will cause consumer prices to rise, said Julian Cubero, a BBVA Bancomer SA economist in Mexico City.
As long as the peso doesn’t continue to depreciate and register volatility, the central bank is “preparing the market to lower interest rates in December,” Cubero said in a telephone interview. BBVA changed today its rate forecast to a 0.25-point cut in December from a 0.25-point increase in May 2013, Cubero said.
Investor concern over a possible U.S. recession and a worsening of Europe’s debt crisis helped send the currency to a 29-month low against the dollar last month. The peso gained 1.2 percent to 13.2683 per U.S. dollar at 2:42 p.m. New York time, pushing its weekly advance to 1.4 percent.
The peso had depreciated 7.3 percent through yesterday since policy makers last met on Aug. 26, and has weakened for five straight months. Its 20 percent loss in 2008 helped push annual inflation up to a seven-year high of 6.53 percent.
Consumer prices in September rose 3.14 percent from a year earlier, the second slowest pace in five years. The central bank’s annual inflation target is 3 percent, plus or minus one percentage point.
The central bank said today that inflation risks showed slight improvement and that general and core inflation continued to evolve favorably. The board said it expects both indicators to be within target range of 2 percent to 4 percent in 2011 and 2012. At the same time, the nation’s exports, imports and industrial output weakened, the central bank said.
Emerging markets including Brazil on Aug. 31 and Israel on Sept. 26 cut their benchmark interest rate on signs of a slowing global economy. Elsewhere in Latin America, central bankers in Chile, Peru and Colombia have kept monetary policy on hold at recent meetings.
Economists from UBS AG, Barclays Capital and Bank of America predicted that Banco de Mexico would cut the rate to 4.25 percent today.
The Bank of Mexico will lower the interbank rate to 4.25 percent in one year, in October 2012, according to the median estimate of 20 economists in an Oct. 4 Banamex survey.
Mexico’s economy is showing signs of slowing in tandem with the U.S., which buys 80 percent of the country’s exports. September’s manufacturing index fell to 50.0 from 51.6 in August after rising from 50.6 in July, while industrial output fell in August for the fourth month in 2011.
Gross domestic product growth will slow this year from a 5.4 percent expansion in 2010, according to the government’s estimate released Sept. 8, and may decelerate further next year in posting 3.5 percent growth.
Carstens said Sept. 15 at the Bloomberg Markets 50 Summit in New York that the balance of risks in Mexico still calls for a relatively neutral monetary policy, although there may be circumstances in the future that call for lower rates.
Other economists don’t agree that U.S. and Mexico growth data are positive enough and the peso depreciation drastic enough to delay a rate cut.
“I think the peso weakness is transitory and the risks that the slowdown is quite marked are high,” said Rafael de la Fuente, a senior economist at UBS in Stamford, Connecticut. De la Fuente said that well-anchored inflation supported his prediction for a rate cut today.