Mexico Bonds and Peso Rally Amid Lower-Than-Forecast Inflation

Mexico’s peso-denominated bonds due next year rallied, pushing yields to the lowest levels in more than three months, after data showed consumer prices rose less than analysts forecast last month.

Yields on the bonds maturing in December 2014 fell 10 basis points, or 0.1 percentage point, to 3.85 percent today in Mexico City, data compiled by Bloomberg show. It was the lowest closing yield since May 22. The peso gained 0.5 percent to 13.1045 per U.S. dollar at 4 p.m. in Mexico City.

Grupo Financiero Santander Mexico SAB today joined Barclays Plc in calling for Mexico policy makers to cut the nation’s reference rate by 0.25 percentage point next month after the central bank reduced it by that amount on Sept. 6 to a record low of 3.75 percent. Annual inflation in August was 3.46 percent, compared with a median estimate of 3.5 percent among economists surveyed by Bloomberg.

“With low levels of inflation and weak growth, we see this possibility that they could cut in October,” Rafael Camarena, an economist at Santander, said by phone from Mexico City. “We need to be evaluating what the effect on inflation will be” from the government’s plan to boost tax collection.

While President Enrique Pena Nieto proposed a tax plan yesterday that the government says would increase revenue as a percentage of GDP by 1.4 percentage points next year and by 2.9 percentage points by 2018, it doesn’t call for taxes on food and medicine as some analysts projected. Taxing food and medicines amid the current economic conditions would hurt Mexican families, Pena Nieto said in a speech yesterday.

The government cut its 2013 growth estimate to 1.8 percent on Aug. 20 from 3.1 percent after exports stagnated.

Pena Nieto also asked Congress yesterday to approve a budget for next year with a deficit of 1.5 percent of gross domestic product, or about 3.5 percent including $27 billion in proposed investment in state oil producer Petroleos Mexicanos.

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