Mexican Inflation Slows to Within its Target in December

Mexican inflation slowed to within its target range in December for the first time in seven months, supporting economists’ forecast that the central bank will keep interest rates at a record low this year.

Annual inflation slowed to 3.57 percent, below the 4 percent top end of the bank’s goal, Mexico’s statistics agency said today. Prices rose 0.23 percent from a month earlier, less than the 0.34 percent median estimate of 16 economists surveyed by Bloomberg.

Inflation has eased from a 30-month high of 4.77 percent in September as economic growth slows and food-price gains weaken after jumps caused by drought and an outbreak of bird flu. Concern that growth in the U.S., Mexico’s biggest trading partner, will slow may also prevent policy makers from raising rates, said Rafael de la Fuente, an economist at UBS AG.

“There’s no reason why you shouldn’t continue to see low prints on inflation,” de la Fuente said in a telephone interview from Stamford, Connecticut. “The base scenario has to be one where the central bank remains on hold.”

The cost of mobile phone service tumbled 20 percent in December after regulators moved to increase competition, Inegi said. Core prices excluding energy and food costs rose 0.12 percent.

Key Rate

Economists forecast the central bank will keep its benchmark lending rate at 4.5 percent until March 2014, when it will raise it to 4.75 percent, according to the median estimate in a survey published Jan. 7 by Citigroup Inc.’s Banamex unit. Consumer prices will increase 3.79 percent this year, according to the median projection in the survey.

Mexico’s inflation-linked bonds declined after the inflation report, pushing yields to a seven-month high. The yield on the notes, known as Udibonos, maturing in 2014 rose six basis points, or 0.06 percentage point, to 1.22 percent at 11:20 a.m. in Mexico City, according to data compiled by Bloomberg.

The peso strengthened 0.5 percent today to 12.7430 per U.S. dollar, extending its gain in 2013 to 0.9 percent. The peso rallied 8.4 percent last year, the most among 16 major currencies tracked by Bloomberg.

Mexico’s economy has been slowing since the second quarter of last year. Growth eased to 3.3 percent in the third quarter from 4.4 percent in the previous three months as business investment in the U.S slowed on concern Congress would fail to avoid $600 billion in automatic spending cuts and tax increases.

Crisis Averted

The U.S. Congress last week reached a compromise that averted the so-called fiscal cliff. At the same time, a battle still looms over raising the $16.4 trillion debt limit, and on automatic spending reductions, known as sequestration, that were delayed for two months.

“The first thing you’ve got to get out of the way is any lingering doubts about the U.S. fiscal cliff,” de la Fuente said.

Growth in Mexico will start rebounding in the second quarter and the second biggest economy in Latin America will expand 3.5 percent in 2013, almost double the U.S., according to median estimates in a Bloomberg survey.

Foreign companies are stepping up to take advantage. Sherwin-Williams Co., the largest U.S. paint retailer, in November agreed to acquire closely held Consorcio Comex SA de CV, Mexico’s largest paint maker, for about $2.34 billion including debt as housing demand improves. Anheuser-Busch InBev NV in June agreed to pay $20.1 billion for the half of Grupo Modelo SAB, Mexico’s largest brewer, that it didn’t already own to speed up its push into faster-growing developing countries.

Inflation Outlook

Central bank minutes from a Nov. 30 meeting published on Dec. 14 said that the inflation outlook has improved “at the margins” and reiterated that policy makers may consider raising rates if new inflation shocks arise. Most board members said higher-than-expected prices set by the government could trigger inflation.

Energy prices climbed 5.62 percent in December from a year earlier, according to the statistics agency, as the government reduced subsidies on gasoline prices.

Taxes on vehicles could also spur faster inflation, said Delia Paredes, an economist Grupo Financiero Banorte SAB. Governments in Mexican states including Chiapas and Sonora have agreed to implement a local-level car tax to replace a federal duty that expired in 2011, while Mexico City plans to expand its own duty.