Mexico Policy Makers Say Slower Inflation Becoming a Trend

Mexican policy makers said slower inflation appears to be gaining traction while risks to growth persist, according to the minutes of their last meeting, fueling speculation they’ll cut borrowing costs this year.

The bank’s board members were unanimous in their decision to leave the benchmark rate at a record-low 4.5 percent for a 32nd straight meeting on Jan. 18, the minutes published today show. Banco de Mexico, led by Governor Agustin Carstens, is the only central bank in the Group of 20 to leave rates unchanged and refrain from purchasing debt to drive down borrowing costs in the past three years.

Credit Suisse Group AG and Deutsche Bank AG forecast a rate cut this year after Banxico said in a statement accompanying last month’s decision that it may lower borrowing costs should inflation continue to slow. The inflation rate dropped more than economists expected to a 15-month low of 3.21 percent in the first half of January after falling within the central bank’s target range in December for the first time since May.

“The downward trend in general and core inflation appears to be confirming itself, based on healthy fundamentals,” policymakers said in the minutes. “If the outlook described is consolidated, a reduction in the benchmark overnight interbank interest rate may be advisable.”

Mexico’s real interest rate, which takes account of inflation, is 0.93 percent, the lowest of any major rate-setting Latin American nation.

Growth, Inflation

Most central bank board members said the balance of inflationary risks have improved while they saw downside risks to economic growth, according to the minutes.

Grupo Financiero Banorte SAB changed its forecast today, saying the central bank will probably cut the reference rate by as much as 75 basis points at its next meeting on March 8.

“These have been the most dovish minutes we have ever seen since the central bank began to publish this document,” Banorte analysts wrote in an e-mailed research note. “It is our take that it will be a once-and-for-all rate cut, and not an easing cycle, so we project the reference rate to end this year at 3.75 percent to 4 percent.”

Yields on peso bonds due in 2022 were little changed at 5.12 percent at 2:50p.m. in Mexico City, according to data compiled by Bloomberg. The Mexican peso rose 0.8 percent to 12.6042 per U.S. dollar.

Slowing Down

Gross domestic product expanded 3.3 percent in the third quarter, down from 4.4 percent in the previous three months. Latin America’s second-biggest economy probably expanded 3.8 percent in 2012, according to the median forecast of analysts surveyed by Bloomberg, after growing 3.9 percent in 2011.

Inflation will accelerate to 3.7 percent by year-end, according to the median estimate in a survey by Citigroup Inc.’s Banamex unit released Jan. 22. Mexico’s central bank targets inflation of 3 percent, plus or minus one percentage point.

Credit Suisse expects the central bank to cut rates by 50 to 100 basis points this year and Deutsche Bank says a reduction of 50 basis points is “feasible.”

Goldman Sachs Group Inc. is “currently assessing close to a 50 percent chance of 50 basis points of easing over the next six months,” although it will keep reviewing inflation figures going forward to decide its position, economist Alberto Ramos said in an e-mailed research note after the minutes were released.

Language in the minutes “shifted into the dovish camp from the previous relatively hawkish/vigilant stance,” Ramos wrote. “The minutes reinforce the notion that if there are cuts it will be a one-off level adjustment.”

Slowing Down

Annual inflation has slowed from a 30-month high of 4.77 percent in September amid an easing in egg and poultry prices that had surged following an outbreak of bird-flu. Reduced fees that America Movil SAB, the wireless provider controlled by billionaire Carlos Slim, charges to connect competitors to its network have also helped curb consumer-price increases.

Core inflation, which excludes energy and food, reached 2.78 percent in the 12 months through mid-January.

Banxico has shifted from its previous statement on Nov. 30, when policy makers said they could raise rates if faster inflation persisted and that the short-term growth outlook had “marginally” worsened on the economic environment in the U.S., the destination of about 80 percent of Mexico’s exports.

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