Quickening Mexico Inflation Reduces Room for March Rate Cut

Mexico’s consumer prices rose more than analysts forecast in the first half of February, reducing room for the central bank to cut rates as early as March.

Prices climbed 0.24 percent, the national statistics agency said today, lifting annual inflation to 3.47 percent as of Feb. 15 from 3.25 percent in January. Analysts had expected prices to rise 0.19 percent, according to the median of 18 estimates in a Bloomberg survey. Core inflation, which excludes energy and agriculture prices, rose 0.24 percent, compared with 0.19 percent forecast by 16 economists surveyed by Bloomberg.

Annual inflation rebounded after touching a 15-month low in January that prompted traders to increase bets the central bank would cut borrowing costs for the first time since 2009. The bank said it may cut the overnight rate from a record-low 4.5 percent if inflation keeps falling toward policy makers’ 3 percent target, leading 19 of 20 economists to forecast lower rates this year in a Feb. 20 Citigroup Inc. survey.

Today’s inflation report “is much higher than expected, and the market will reduce the probability of a rate cut in March,” Marco Oviedo, an economist at Barclays Plc, said in a telephone interview from Mexico City. For the rate cut outlook, the report “poses risks to the central scenario, which is a lower inflation environment,” he said.

’Greater Convergence’

The cost of mobile phone service rose 8.4 percent in the first half of February from two weeks earlier, the statistics agency said in its report, after prices tumbled in December as regulators moved to increase competition in the sector. Green tomato costs rose 14.8 percent, the institute said.

Banco de Mexico may cut rates “if we keep advancing in this convergence process, and it’s shown that we have inflation each time closer to 3 percent in a more sustainable way,” central bank Governor Agustin Carstens said Feb. 13. “We would like, with time, to see a greater convergence in inflation toward 3 percent.”

Yields on fixed-rate Mexican government bonds due in 2024 fell one basis point, or 0.01 percentage point, to 5.06 percent at 10:36 a.m. in Mexico City, according to data compiled by Bloomberg. Yields on inflation-linked bonds maturing in 2014 fell one basis point to 1.11 percent. The peso was little changed from yesterday at 12.7442 per dollar. The peso rose 8.4 percent last year, the most among 16 major currencies tracked by Bloomberg.

Slowing Growth

While prices rose more than expected, growth indicators showed signs of slowing economic expansion. January’s unemployment rate rose more than all 16 economists’ estimates in a Bloomberg survey to 5.42 percent, the statistics agency said today. Yesterday the agency reported December retail sales posted their first contraction since April 2010. December industrial output also dropped, surprising every economist surveyed by Bloomberg.

“Growth at least in the first half of the year will moderate. We’ll be seeing a much weaker external demand and this will eventually translate into domestic demand numbers,” Grupo Financiero Banorte SAB economist Delia Paredes said in a telephone interview from Mexico City. “We continue to expect Banco de Mexico to cut rates in its March 8” meeting.

Analysts see a 50 basis-point rate cut by April, according to the median estimate in the most recent bi-weekly survey by Citigroup’s Banamex unit. In the previous poll they forecast a change in rates in January 2014.

GDP Expansion

Gross domestic product rose 0.8 percent in the fourth quarter from the previous three months, more than the 0.6 percent median estimate in a Bloomberg survey of seven economists, while the central bank said Feb. 13 that Mexico’s economic expansion is more likely to slow than speed up and could be held back if growth stalls in the U.S.

Mexico’s economy will probably expand 3.5 percent this year and 3.9 percent in 2014, according to the median forecast of economists surveyed by Bloomberg, after growing 3.9 percent in 2012.

Manuel Sanchez, one of five Banco de Mexico board members, disagreed with the view of the board’s majority on inflation, saying in a Feb. 20 report that Mexico still needs a “vigilant” monetary policy. Sanchez said that annual price increases haven’t been converging toward the target and highlighted the seven months that inflation spent above the 4 percent upper end of the central bank’s target range last year.

“Convergence of inflation to the permanent target demands more than a few months of good results,” Sanchez wrote.

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