Mexico Holds Key Rate as Weaker Peso Undermines CPI Gains
Mexico’s central bank kept its overnight rate at a record low as policy makers balance slowing growth with above-target inflation and a weakening currency in Latin America’s second-biggest economy.
Banco de Mexico, led by Governor Agustin Carstens, held the overnight rate at 4 percent today, as forecast by all 23 economists surveyed by Bloomberg. The peso has plunged 3.2 percent since Federal Reserve Chairman Ben S. Bernanke signaled May 22 the U.S. could dial back its monthly bond-buying program.
Annual inflation has eased more than expected to just above the 2 percent to 4 percent target range and economists lowered their growth forecasts for this year to the slowest pace since the 2009 recession. Policy makers said in today’s statement keeping the rate unchanged was appropriate as they measure the risks of a prolonged economic deceleration and new inflationary pressures.
Policy makers were “dovish, due to the economic slowdown on a global level as well as in Mexico, and more comfortable with the inflation trajectory,” Delia Paredes, an economist at Grupo Financiero Banorte SAB, said in an e-mailed response to questions. “Nevertheless, the volatility and Mexico’s monetary position relative to other countries are what won’t permit them to move rates for a period of time.”
The decision comes after Bernanke said July 10 the U.S. needs “highly accommodative monetary policy for the foreseeable future,” triggering a rally in emerging market assets. Mexico’s main stock index climbed 1.2 percent yesterday. The peso strengthened 0.7 percent against the dollar.
The peso was little changed at 12.8009 per dollar at 9:57 a.m. in Mexico City. The national statistics agency reported earlier today that May industrial production rose 0.5 percent from a year earlier, compared to the 0.6 percent median forecast in a Bloomberg survey.
Yields on six-month interest-rate swaps fell two basis points, or 0.02 percentage point, to 4.29 percent, indicating traders see about a 20 percent chance the bank will lower rates this year. As recently as July 8, traders didn’t see any chance of a rate cut.
While policy makers cited the short-term risk of new threats to consumer prices, they don’t expect the peso’s recent weakness to generate inflationary pressures, according to the statement accompanying today’s decision. They forecast inflation will ease below 4 percent in the second half of the year and “very near” 3 percent in 2014.
Today’s decision reflects “the recent evolution in inflation and its outlook, the significant deceleration in the Mexican economy, the fragility of the external situation and the volatility in international financial markets,” policy makers said in the statement.
Mexico joined South Korea in holding rates this week, while central banks in Brazil and Indonesia raised borrowing costs. Yields on Egyptian bonds fell to their lowest in five weeks as the country’s army-backed government won pledges of support among Persian Gulf nations in its efforts to revive the economy.
Mexico policy makers will monitor foreign monetary policy for its impact on the nation, and emerging-market growth has slowed more than anticipated, the central bank board said in its statement today.
In Mexico, annual inflation eased more than economists expected the past two months, slowing to 4.09 percent in June from a seven-month high of 4.65 percent in April as farm prices slid. The figure dipped to 3.93 percent in the second half of June, according to a July 9 report by the national statistics institute.
Policy makers said in their previous rate decision on June 7 that annual price increases would slow to within the target range in the second half of the year.
Still, Mexico’s currency yesterday remained 6.5 percent below a two-year high reached in May before Bernanke’s comments about the bond-buying program. A weaker peso increases the price of some imported goods and services.
“Bernanke’s words have generated a material depreciation of the Mexican currency,” Alberto Bernal, the head of fixed-income research at Bulltick Capital Markets in Miami, said in an interview before today’s decision. “That has tied the hands of Banxico in terms of providing the Mexican economy with additional levels of monetary stimulus.”
Economists cut their 2013 growth forecast to 2.7 percent on June 20 from 3 percent on June 5, according to a poll by Citigroup Inc.’s Banamex unit. The government cut its estimate in May to 3.1 percent from 3.5 percent after expansion slowed more than expected to 0.8 percent in the first quarter.
Credit Suisse Group AG economist Alonso Cervera, who sees a 50 percent chance of a rate cut this year, says President Enrique Pena Nieto’s pledge to open the state oil industry to more private investment may help strengthen the peso.
Proposed energy changes, which are designed to reverse eight years of declining output at the world’s fourth-largest oil producer, may be ready by the end of the summer, Hector Moreira, a board member of state-controlled Petroleos Mexicanos, said July 10 at the Bloomberg Mexico Conference in New York.
“Approval of key pending reforms would presumably lead to a stronger currency, under normal conditions,” Cervera said in an e-mailed response to questions. Cervera added that his call is also “based on what we see as disappointing GDP growth in a context of contained inflation.”
Mexico’s auto exports, which grew 9.9 percent last year, declined 1.2 percent during the first six months of the year compared with the same period in 2012, according to data from the automobile industry association AMIA.
Government spending fell 5.1 percent in real terms to 1.45 trillion pesos in the first five months of 2013 compared with the year-earlier period, according to data from the Finance Ministry. Public spending under the administration has been the weakest in the past 12 years, according to a July 5 report by Deutsche Bank AG.
Spending delays hit construction company Empresas ICA SAB (ICA*), whose credit rating was cut by Moody’s Investors Service and Standard & Poor’s amid declining earnings. The lag was due to a change in administration after Pena Nieto took office in December and has been corrected as of June, Finance Minister Luis Videgaray said earlier this week.
Threats to growth have “intensified,” central bank board members said in minutes of their June 7 rate meeting, when they left the key rate unchanged.
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