Mexico Signals Possible Cut as Key Rate Left Unchanged

Mexico’s central bank left its benchmark interest rate at a record low after annual inflation slowed within the target range for the first time since May, saying a rate cut is possible if price growth continues to ease.

Policy makers, led by bank Governor Agustin Carstens, left the overnight lending rate at 4.5 percent for the 32nd consecutive meeting, as forecast by all 19 analysts surveyed by Bloomberg. Mexico is the only Group of 20 nation to leave rates unchanged and not step up asset purchases in the past three years.

Mexico’s real interest rate, which takes account of inflation, is the lowest of any major rate-setting Latin America nation at 0.93 percent as policy makers attempt to maintain economic growth. The central bank said in its decision today that the outlook on inflation has improved as price pressures subside, while risks to the nation’s economic growth persist.

“The possibility of a rate cut has risen substantially,” Sergio Luna, chief economist at Citigroup Inc.’s Banamex unit, said in a telephone interview from Mexico City. The central bank has “removed the restrictive bias from the end of last year,” said Luna, who sees a 40 percent chance the bank will cut rates in the first half of this year.

The peso fell 0.6 percent, the most in four weeks, to 12.6613 per dollar at 11:15 a.m. in Mexico City. That would be the peso’s biggest decline on a closing basis since Dec. 21. Yields on peso bonds due in 2022 fell 7 basis points, or 0.07 percentage point, to 5.24 percent, extending their drop this week to 16 basis points.

Shifting Stance

The central bank’s shift in stance came after inflation slowed to 3.57 percent last month from 4.18 percent in November following government moves to increase competition in the telecom industry, leading America Movil SAB, the wireless provider controlled by billionaire Carlos Slim, to cut fees. The central bank targets inflation of 3 percent, plus or minus one percentage point.

If a “downward trend in general and core inflation” is confirmed, “a reduction in the one-day interbank interest rate may be advisable,” the central bank said in a statement accompanying today’s decision. The rate cut would respond to “a situation of less economic growth and lower inflation.”

Latin America’s biggest economy after Brazil grew 3.3 percent in the third quarter, down from 4.4 percent in the previous three months, as business investment in the U.S slowed on concern Congress would fail to avoid the so-called fiscal cliff of $600 billion in automatic spending cuts and tax increases.

Brazil, Mexico

Brazil’s economic growth will outpace Mexico’s for the first time in three years in 2013 as fiscal stimulus measures and lower interest rates boost domestic demand, the World Bank forecast on Jan. 15.

The Brazilian economy will grow 3.4 percent this year, up from 0.9 percent in 2012, while Mexico’s expansion slows to 3.3 percent from 4 percent as growth in the U.S., its main export market, remains sluggish, the Washington-based bank said.

In its previous monetary policy statement released Nov. 30, the central bank said it could raise rates if fast inflation persisted, adding that the short-term growth outlook had “marginally” worsened on the economic environment in the U.S., the destination of around 80 percent of Mexico’s exports.

Since then, the U.S. Congress reached a compromise that averted part of the fiscal cliff. 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.

‘More Dovish’

Banco de Mexico’s “more dovish” tone will fade and the bank will refrain from rate cuts as U.S. and Mexican manufacturing activity pick up in the first half of the year, Italo Lombardi, an economist at Standard Chartered Bank in New York, wrote in a research note.

“We reinforce our view of rates on hold throughout the year,” Lombardi wrote.

Inflation slowed in November and December as mobile-phone prices tumbled 39 percent in those months from October after Slim cut the fees to competitors to avoid a $1 billion fine imposed by regulators in an antitrust case.

“Mobile telecom prices really came down sharply in late 2012 and that explained most of the improvement” in inflation, Alonso Cervera, a Latin America economist at Credit Suisse Group AG, said in a telephone interview from Mexico City.

Enrique Alvarez, the head of Latin America fixed-income research at IdeaGlobal, says that while telecommunications helped inflation slow at the end of the year, rising food and beverage costs could persist. Food, beverage and tobacco prices rose 6.11 percent in 2012, according to the statistics agency.

They are “the Achilles Heel” of Mexican inflation, Alvarez said in a telephone interview from New York. “As you look further out, there are plentiful potential headwinds that you’re going to have to face.”

Before it's here, it's on the Bloomberg Terminal.