Mexico Inflation Declines to New Low as Peso Impact Limited

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Mexico’s consumer prices rose less than expected in the first half of August, pushing the inflation rate to a new record low.

Prices advanced 0.12 percent from the previous two weeks, the national statistics institute said on its website Monday, compared with the 0.16 percent median forecast of 18 analysts surveyed by Bloomberg. The annual inflation rate dropped to 2.64 percent, the lowest since biweekly data began in 1989 and down from 2.72 percent in the second half of July.

Mexico’s inflation rate has fallen to a record low even as currencies across Latin America tumble and inflation in countries such as Peru, Colombia and Chile accelerates. Weak growth, falling phone-service costs and lower gasoline-price increases pushed annual inflation in the full month of July to the least since 1968.

“This report clearly shows that the effect on inflation from the weaker peso is limited,” Carlos Capistran, chief Mexico economist at Bank of America Corp., said by telephone. “That’s important because it gives the central bank space to manage the external shocks the economy is undergoing.”

The currency’s slide has only had an impact on prices for some durable goods and hasn’t had a broader impact or contaminated inflation expectations, Banco de Mexico said in a presentation Aug. 12. Policy makers expect price increases to remain below the 3 percent target for the rest of this year.

Peso Decline

The peso weakened 1.2 percent to 17.1829 per U.S. dollar at 8:46 a.m. in Mexico City. The currency hit the lowest since a 1993 redenomination on Monday and has tumbled 24 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 and public spending in Mexico.

Core prices, which exclude energy and farm costs, increased 0.12 percent in early August, less than the 0.15 percent median forecast of analysts surveyed by Bloomberg.

While Banco de Mexico has kept borrowing costs at a record-low 3 percent since June 2014 in a bid to boost growth, policy makers have indicated they may need to raise interest rates in 2015 in response to a likely increase by the Federal Reserve. The central bank has also said it’s watching for the potential emergence of inflation pressures due to weakness in the peso.

Mexican policy makers will raise borrowing costs this quarter for the first time since 2008, according to the median forecast of economists surveyed by Bloomberg.

Banco de Mexico kept interest rates at a record low on July 30, saying Latin America’s second-largest economy continues to show weakness. Since December, economists have cut their 2015 economic growth forecasts by more than a percentage point to 2.3 percent, a Citigroup Inc. survey showed Aug. 20.

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