Mexico Prices Fall in June, Boosting Prospect of Rate Hold

July 9 (Bloomberg) -- Mexico’s consumer prices fell more than analysts forecast in June, reinforcing bets the central bank will leave interest rates on hold this year as falling farm prices offset inflationary pressure from a weakening peso.

Prices slid 0.06 percent from May, the national statistics agency said today on its website, compared with a median forecast for a decline of 0.02 percent from 22 economists surveyed by Bloomberg. Farm prices tumbled 3 percent, the most in more than two years. Annual inflation slowed to 4.09 percent from 4.63 percent in May. Core prices, which exclude energy and farm costs, rose 0.13 percent in the month, compared with the median forecast of 0.17 percent.

The drop in farm prices helps counterbalance the weaker peso, which has slid 3.5 percent since Federal Reserve Chairman Ben S. Bernanke said May 22 the U.S. central bank may reduce the pace of asset purchases. June’s inflation eases pressure on Mexican policy makers and eliminates the possibility of a rate increase, said Marco Oviedo, chief Mexico economist at Barclays Plc, in a telephone interview.

Today’s inflation report “validates the view of the central bank being on hold,” Oviedo said. “Non-core prices are falling faster than we had anticipated.”

Economists expect Banxico’s next rate move to be a quarter-point increase in November 2014, according to the median estimate in a July 5 survey by Citigroup Inc.’s Banamex unit.

Fruit & Veg

Prices for fruits and vegetables dropped 7.8 percent in June from May, contributing to a 0.7 percent decline in non-core prices. Green tomato prices tumbled 56 percent, contributing the most to the drop in consumer prices, and lime prices slid 33 percent.

The peso was little changed at 12.8756 per dollar at 10:07 a.m. in Mexico City. Yields on inflation-linked bonds maturing in December 2013 tumbled 16 basis points, or 0.16 percentage point, to 0.02 percent.

The pace of annual inflation slowed to 3.93 percent in the second half of June, within the central bank’s 2 percent to 4 percent target range.

Threats to growth in Latin America’s second-largest economy have “intensified” and inflation will slow toward the 3 percent target, central bank board members said in minutes of their June 7 meeting. They left the key rate unchanged at a record-low 4 percent after cutting it in March for the first time since 2009.

Stronger Odds

The peso’s plunge has ended the possibility of a second rate cut this year and strengthened the odds for an increase, according to the median estimate in the July 5 Banamex survey. In a June 5 poll, economists had forecast a half-point cut in September. The Fed’s announcement that it may phase out asset purchases, known as quantitative easing, has reduced demand for emerging-market assets.

“With the increased probability that the Fed starts to unwind QE, we think Banxico will want to start adopting a more hawkish tone,” Benito Berber, a New York-based strategist at Nomura Holdings Inc.’s, wrote in an e-mailed note today.

The central bank will leave rates unchanged in its next decision on July 12, according to the median estimate of all 23 economists surveyed by Bloomberg.

The July 5 survey also showed that economists cut their median forecast for year-end inflation to 3.79 percent from 3.9 percent and left their annual growth projection at 2.7 percent, down from 3 percent on June 5 and less than the government’s 3.1 percent forecast. The government cut its own prediction in May from 3.5 percent after expansion slowed more than expected to 0.8 percent in the first quarter, the least since the end of the 2009 recession.

To contact the reporters on this story: Eric Martin in Mexico City at emartin21@bloomberg.net; Ben Bain in Mexico City at bbain2@bloomberg.net.

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net.