Mexico Industry Output Falls Three Times More Than Forecast

Mexico’s industrial production fell three times more than analysts forecast in March, reinforcing expectations that the central bank will cut interest rates for the second time since 2009 later this year.

Output slid 4.9 percent from a year earlier, the biggest decline since the end of the 2009 recession and more than the 1.4 percent median estimate of 16 economists surveyed by Bloomberg. Manufacturing contracted 5.8 percent and construction fell 5.2 percent, the national statistics institute said on its website today.

The central bank unexpectedly cut its benchmark interest rate by half a point to a record low 4 percent on March 8 as growth slowed. In April, policy makers left the rate unchanged after inflation exceeded the upper limit of their target range. Inflation will slow in the second half, the central bank said in the minutes of their April 26 meeting published today. Most board members said they expect U.S. growth to slow in the second quarter and a prolonged recession in Europe.

The industrial production figure is a “poor number, so it does support our rate cut view,” Gabriel Casillas, chief economist at Grupo Financiero Banorte SAB in Mexico City, said in an e-mail. At the same time “the tone of the minutes is very dovish.”

Mirroring Carstens

The minutes mirrored comments by central bank Governor Agustin Carstens earlier this week that led Banorte to join UBS AG and Barclays Plc in forecasting a cut this year. Banorte, which previously expected rates to remain unchanged this year, forecast Banxico will reduce the key rate to 3.5 percent in July.

“Economic activity in Mexico has decelerated and there are downside risks to growth,” the majority of the board said at the April 26 meeting, according to the minutes.

The peso weakened 1.2 percent to 12.1374 per dollar at 11:03 a.m. in Mexico City. The currency has soared 5.9 percent this year, the most of all 16 major currencies tracked by Bloomberg, as investors search for yields amid global monetary easing and speculation increases President Enrique Pena Nieto will pass energy and tax overhauls to boost growth.

Yields on peso-denominated fixed-rate government bonds maturing in 2024 rose six basis points, or 0.06 percentage point, to 4.54 percent.

U.S. Growth

Gross domestic product in the U.S., the buyer of about 80 percent of Mexico’s exports, rose at a 2.5 percent annualized rate in the first quarter, less than the median 3 percent forecast in a Bloomberg survey of 86 economists.

U.S. growth will slow to 1.6 percent in the second quarter, according to the median forecast of economists in a Bloomberg survey.

Mexico’s industrial activity fell 0.3 percent in March from the previous month, compared with the 0.1 percent median decline estimated by seven economists surveyed by Bloomberg.

“There continues to be weakness in many areas associated with exports,” Rafael Camarena, an economist at Grupo Financiero Santander Mexico SAB, said in a phone interview from Mexico City. “This would help favor an environment where monetary policy could be eased.”

Still, Camarena expects interest rates to be unchanged this year given annual inflation, at 4.65 percent in April, is above the upper limit of the bank’s 2 percent to 4 percent target range.

The minutes show that one of the central bank board members said it isn’t clear that inflation is converging toward its 3 percent target.

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