Mexico Mid-July Inflation Rate at Lowest Since at Least 1989

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Mexico’s consumer prices rose less than expected in the first half of July, pushing the annual inflation rate to the lowest in at least a quarter century, amid persistent economic weakness.

Prices advanced 0.09 percent from the previous two weeks, the national statistics institute said on its website Thursday, less than forecast by any of the 21 analysts surveyed by Bloomberg and below the 0.20 percent median projection. The annual inflation rate dropped to 2.76 percent from 2.87 percent in the second half of June.

The central bank expects inflation to remain below its 3 percent target for the rest of this year as the economy grows below its potential. While Banco de Mexico is forecast to keep borrowing costs at a record-low 3 percent next week, policy makers have indicated they’re keeping a close watch on the peso, which slid to a record low Wednesday, and may need to raise raise rates in response to a likely U.S. increase.

“Banxico is still facing a dilemma,” said Marco Oviedo, chief Mexico economist at Barclays Plc. “On the one hand, the peso is depreciating faster than expected, but the domestic conditions are supportive to inflation control.”

The yield on inflation-linked bonds due in June 2016 increased 0.13 percentage point to negative 0.03 percent, according to data compiled by Bloomberg.

The peso strengthened 0.1 percent to 16.0799 per U.S. dollar at 8:37 a.m. in Mexico City. The currency has tumbled 20 percent in the past year, reflecting expectations for an interest-rate increase in the U.S. and the impact of low crude prices on growth.

Inflation History

Core prices, which exclude energy and farm costs, increased 0.1 percent in early July from the previous two weeks, less than the 0.16 percent increase that was the median forecast of analysts. The lower-than-forecast core reading suggests an absence of demand in the economy, Oviedo said.

Data on Mexico’s bi-weekly inflation go back to 1989 on the website of the nation’s statistics institute, while data on the monthly inflation rate starts 1970. Prices for the full month of June rose 2.87 percent from a year earlier, the lowest since a 1.9 percent increase in 1968, when information on price changes was limited to Mexico City.

Despite weak growth and low inflation, Mexican policy makers will raise borrowing costs this quarter for the first time since 2008 as the Fed lifts rates, according to the median forecast of economists surveyed by Bloomberg. The difference between the U.S. and Mexico target rates is 2.75 percentage points, the least since Mexico adopted a new benchmark in 2008.

The Federal Reserve “will continue to be a strong factor,” Oviedo said.

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