Mexico Keeps Its Benchmark Rate at 4.5% as Inflation Remains Under Control
Mexico’s central bank kept its benchmark interest rate unchanged for a ninth straight meeting, saying inflation will remain within its forecasts and the European debt crisis presents new risks.
Policy makers said global uncertainty has increased amid greater risk that some European countries may default on their debt, reflecting their “precarious fiscal situation,” the bank said in a statement today. Industrialized countries’ central banks will probably maintain their “accommodative” monetary policy stance for longer than investors anticipated, it said.
“Going forward, the uncertainty associated with the European crisis presents risks that weren’t previously contemplated,” the bank said.
The yield on Mexico’s 10 percent peso bond due in 2024 fell one basis point today, or 0.01 percentage point, to 7.77 percent, according to Banco Santander SA. The price of the security rose 0.03 centavo to 119.36 centavos per peso.
The peso rose 1.1 percent to 12.9954 per dollar at 11:28 a.m. New York time, its first gain in seven days as Europe’s debt crisis damps appetite for higher-yielding assets.
“It has a neutral to dovish tone,” Italo Lombardi, a Latin America economist and strategist at BNP Paribas in New York, said about the statement. “It shows the economy at a fairly early stage in terms of domestic demand, highlighting the slack in the economy.”
Investors are concerned that Greece’s debt crisis may spread to other European countries such as Spain and Portugal, potentially weakening the euro and the region’s economy.
European leaders agreed May 10 to a $1 trillion lending backstop for indebted euro nations. Greek Prime Minister George Papandreou has raised taxes, cut wages and government spending to tame a deficit that reached 13.6 percent of gross domestic product last year, more than four times the EU limit.
Mexico’s central bank is unlikely to increase rates before the Federal Reserve does, according to Ricardo Aguilar, an economist at Invex Casa de Bolsa in Mexico City. Mexico sends about 80 percent of its exports to the U.S.
“We don’t see why Banco de Mexico would separate itself” from the Fed, Aguilar said. “The general level of prices in the economy is contained.”
Federal Reserve officials voted 9-1 last month to retain a pledge to keep the federal funds rate at a record low for an “extended period.” While the labor market is “beginning to improve,” employers are still reluctant to hire, and inflation will remain “subdued for some time,” the Fed said in minutes of its April 27-28 meeting.
Mexico’s central bank will raise borrowing costs in January 2011, according to the median estimate of analysts in a survey released May 20 by Citigroup Inc.’s Banamex unit. Morgan Stanley, JPMorgan Chase & Co. and Goldman Sachs Group Inc. are among banks that say the first increase won’t come until 2011.
“There are more reasons to stay put,” said Sergio Luna, an economist at Citigroup Inc.’s Banamex unit in Mexico City. “Inflation has been reasonably good. Activity is recovering, but with a big output gap.”
Banco de Mexico cut its benchmark interest rate by 3.75 percentage points last year amid the global financial crisis.
Mexico’s economic rebound is coming “on the back of U.S. manufacturing growth,” said Alejandro Cuadrado, Latin America economist at Societe Generale SA in New York. Domestic sectors such as the service industry continue to lag behind, he said.
“That means the central bank will be looking to continue stimulating the economy, particularly domestically,” Cuadrado said in a telephone interview.
Lower interest rates can bolster economic growth by encouraging borrowing that leads to consumer spending and business investment. Cheaper loans also risk fanning inflation should demand exceed supply.
Consumer prices fell more than forecast last month in the $1.09 trillion economy as costs decreased for fruits, vegetables and electricity, pushing the annual rate of inflation to the lowest since December.
Prices dropped 0.32 percent in April from March, the biggest monthly decline in three years, and increased 4.27 percent from a year earlier, the central bank said May 7.
Banco de Mexico said when it held the benchmark interest rate unchanged last month that inflation will stay in line with forecasts policy makers set in December. It also said that manufacturing exports are increasing “vigorously” because of higher U.S. demand.
The economy is recovering from a 6.5 percent contraction last year, the biggest slump since 1932. The central bank forecasts growth of 4 percent to 5 percent this year.
Mexico’s statistics agency yesterday reported that the economy in the first quarter expanded for the first time on an annual basis in more than a year as manufacturing surged on greater demand for exports to the U.S.
Gross domestic product grew 4.3 percent in the first three months of the year compared with the same period a year earlier, exceeding analysts’s forecasts.
Mexico’s industrial production rose the most in almost four years in March on surging demand for exports, climbing 7.6 percent from a year earlier, the agency reported May 12.
Mexican production of cars and light trucks rose 69.6 percent in April from the same month a year earlier, the nation’s Automobile Industry Association reported May 12.