Mexico Central Bank Tempers CPI Concerns in Holding Rate

Mexico’s central bank left its benchmark interest rate at a record low, saying it may still raise rates if inflation doesn’t ease while no longer specifying it could do so “soon.”

The bank’s board, led by Agustin Carstens, left the overnight lending rate at 4.5 percent for the 31st consecutive meeting today, after the economy in the third quarter grew at the slowest pace in more than a year and inflation slowed toward policy makers’ target. Twenty-one out of 22 analysts surveyed by Bloomberg expected the bank to stay on hold. One economist forecast a quarter point increase.

Annual inflation, which has remained above the central bank’s 2 percent to 4 percent target range since June, slowed to 4.36 percent in the first half of November, in line with policy makers’ expectations that a jump in farm prices is dissipating. Short-term risks to growth have increased “marginally” and annual inflation will “probably” end the year below 4 percent, the central bank said in its statement accompanying today’s decision.

The central bank “was much more dovish on inflation in the statement today,” said David Rees, an emerging markets economist at Capital Economics Ltd. in London. “We doubt growth is going to be strong enough to trigger any interest rate hikes” next year, he said.

Gross domestic product grew at an annualized rate of 1.82 percent in the third quarter as manufacturing expansion slowed on lower demand from the U.S.

Changed Language

“The recent reduction in inflation has been noteworthy,” the central bank said in its statement. “If new shocks to inflation emerge, even if they are presumed to be temporary, and the trend shifts in general and core inflation aren’t confirmed, the board thinks that an upward adjustment in the reference interest rate could be appropriate.”

The bank had said in the statement accompanying its prior decision on Oct. 26 that if inflation doesn’t ease, it could raise its benchmark rate “soon” for the first time since August 2008. Minutes from that decision released Nov. 9 showed that most policy makers thought that inflation probably peaked in September at 4.77 percent. The consumer price index slowed to 4.6 percent in October.

The central bank’s tone remained hawkish today as it still referred only to the possibility of raising rates, according to Gabriel Casillas, the chief economist and head of research at Grupo Financiero Banorte SAB.

“The balance is still tilted to rate hikes,” Casillas said in an e-mailed note to clients today. “Going forward, it is going to be important to watch for inflation, inflation expectations, and wage negotiations in order to keep gauging when Banxico could decide to restrict its monetary stance.”


Mexico’s economic growth eased in the third quarter as U.S. business investment slowed on concern Congress will fail to act in time to avoid the so-called fiscal cliff of $600 billion in automatic spending cuts and tax increases.

“Even though it’s an annual inflation targeter, the bank always has this balance of risks between growth and inflation,” Gabriel Lozano, chief Mexico economist at JPMorgan Chase & Co., said in a telephone interview from Mexico City before the decision was announced. While “there is a sense that the next move should be upward,” the growth risks “warrant a more cautious approach,” he said.

Swap Rates

Mexico’s peso rose 0.2 percent to 12.9213 per U.S. dollar at 11:43 a.m. in Mexico City. The peso has strengthened 7.9 percent against the dollar this year, the most among 16 major currencies tracked by Bloomberg. One-year swap rates dropped five basis points, or 0.05 percentage point, to 4.91 percent, the lowest level on a closing basis since Nov. 16, according to the most recent data from JPMorgan Chase & Co.

Accelerating inflation, sparked by a bird flu outbreak and drought that drove up grain, egg and chicken prices, has affected companies including Grupo Bimbo SAB, the world’s largest bread-maker.

Bimbo said Oct. 25 that profit fell for a fourth consecutive quarter due in part to higher wheat costs, as well as expenses integrating Sara Lee’s North American bakery business.

The only Group of 20 nation to leave borrowing costs unchanged and not step up asset purchases in the past three years will wait until January 2014 to raise rates by a quarter percentage point, according to a Citigroup survey of economists published Nov. 20.

“This is a central bank that still sees inflation and growth as skewed to the downside in the medium term,” Rafael de la Fuente, an economist at UBS AG, said in a telephone interview from Stamford, Connecticut before the report. “Inflation has been coming down since October.”

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