• Policy makers see economic pick-up limited by exports, oil
  • Banco de Mexico monitoring impact of potential Fed increase

Mexico’s central bank narrowed its 2015 growth forecast, saying improvement is being limited by stalled exports and weak industrial output, and that inflation will remain near policy makers’ target for two years.

Gross domestic product will increase 1.9 percent to 2.4 percent this year, compared with the previous forecast of 1.7 percent to 2.5 percent, the central bank said in its quarterly inflation report published Wednesdayon its website. Growth will then probably accelerate over the next two years, policy makers said.

While most economists surveyed by Bloomberg expect Mexico to raise interest rates in December following an expected increase by the Federal Reserve, Governor Agustin Carstens said a U.S. move doesn’t necessarily require Mexico to follow suit, given current economic conditions. The peso’s tumble to a record low has shown few signs of spurring inflation, though Carstens emphasized that the bank is watching for signs of pass-through to consumer prices.

"Banco de Mexico will be very attentive to the actions taken by the Federal Reserve, but you can’t assume that there will be an automatic and immediate response from the bank," Carstens said. "The board has the obligation to do an exhaustive analysis, taking all the elements that at one point might affect inflation and inflation expectations."

The central bank has left interest rates at a record low since mid-2014 to boost an economy suffering under a drop in oil prices, falling output at state-owned producer Petroleos Mexicanos and a weaker-than-expected recovery in the U.S. Despite weak growth and the slowest inflation in more than four decades, Banco de Mexico has signaled that higher borrowing costs in the U.S. may call for an increase in Mexico to keep investors from pulling money out of Latin America’s second-largest economy.

The peso has declined 18 percent against the dollar in the past year, reflecting expectations for higher borrowing costs in the U.S. and the drop in oil prices. The peso’s weakness has mainly affected durable goods prices, Carstens said. The currency showed little reaction to the inflation report, maintaining its loss. The currency fell 0.8 percent to 16.5271 per dollar.

"Banxico has made a great effort selling its synchronization stance, but given the disappointing economic growth the central bank wants to add some flexibility to remain relatively more supportive" if the economy falters, Pedro Uriz, a strategist at Banco Bilbao Vizcaya Argentaria SA’s Mexico unit, said in a research note e-mailed to clients.

Mexico’s annual inflation rate fell to 2.52 percent in September, the lowest since 1968.

The central bank in July rescheduled its policy meetings for the rest of this year to reduce the number of days between its rate decisions and those of the Fed. Asked Wednesday about the meeting schedule for next year, Carstens said he expects the central bank to publish the calendar in coming weeks. Last year, the calendar for 2015 was published in the November quarterly inflation report.

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