Mexican Prices Rose More Than Expected in Early September

Mexican consumer prices rose more than economists expected in the first half of September as gasoline and farm costs climbed.

Prices rose 0.34 percent in the first two weeks of the month, the national statistics agency said today on its website, compared with the 0.23 percent median forecast of 17 economists in a Bloomberg survey. Annual inflation was 3.46 percent, unchanged from August and remaining below the 4 percent upper limit of the central bank’s target range. Core prices, which exclude energy and farm costs, increased 0.3 percent, more than the 0.22 percent median projection.

Mexican policy makers surprised analysts by cutting the benchmark interest rate for a second time this year on Sept. 6, saying the economy suffered a significant and unexpected slowdown in the second quarter. Most economists expect the central bank to reduce borrowing costs again in October, after cutting the overnight lending rate by 25 basis points to a record 3.75 percent, following a slowdown of inflation in each of the previous four months.

The consumer price increase was “higher than expected basically on the back of prices of goods set by the government, i.e. gasoline,” Benito Berber, a strategist at Nomura Holdings Inc., said in an e-mail. “I don’t think this small uptick on inflation will stop Banxico from cutting rates on October 25.”

Peso Weakened

The peso weakened 0.7 percent to 12.8915 per dollar at 9:30 a.m. in Mexico City. The currency rallied last week after the U.S. Federal Reserve refrained from paring its $85 billion monthly stimulus program, which has fueled demand for Mexican securities.

Yields on fixed-rate government peso bonds due in 2024 rose six basis points, or 0.06 percentage point, to 6 percent.

Agriculture and livestock prices increased 0.54 percent in the first half of September, while energy and other prices that are set by the government rose 0.4 percent.

Mexican policy makers were split in their decision to cut the interest rate this month, according to minutes of the Sept. 6 meeting published on Sept. 20.

While three board members supported the rate cut, two voted to keep it on hold, saying they would rather wait until the Federal Reserve clarified its strategy before changing the monetary stance. The subsequent Fed decision against tapering stimulus led the peso to strengthen and will increase support in Mexico’s central bank for an additional rate cut, according to Alonso Cervera, chief Mexico economist at Credit Suisse Group AG, said in a Sept. 20 interview.

Hurricane Damage

Hurricanes Manuel and Ingrid, which have caused damage in 26 states and left 123 people dead, are likely to lead to higher near-term inflation after they destroyed crops and hurt public infrastructure, said Alberto Ramos, the chief Latin America economist at Goldman Sachs Group Inc. Still, the weakness in the economy, deepened by the storms, will probably be a bigger focus than inflation for policy makers, Ramos said today in an e-mailed research report.

“The latest developments have increased even more the probability that the central bank will cut the policy rate once more by 25 basis points at the October 25 meeting,” Ramos said. There’s also “the possibility of a larger 50 basis point cut in October or a follow-up 25 basis point cut at the December 6 meeting depending on how the economy responds to the recent developments.”

Inflation Outlook

The majority of policy makers at the Sept. 6 central bank meeting said that “in coming months, it’s expected that inflation’s path will be lower than previously anticipated due to estimates that the large degree of slack in the economy will continue in the second half of this year and next year,” according to minutes published on Sept. 20.

Inflation will end the year at 3.5 percent, according to the median estimate in a bi-weekly survey by Citigroup Inc.’s Banamex unit published on Sept. 20, down from a 3.52 percent estimate in the previous survey. Fourteen of 20 analysts in the survey see a quarter point cut by year end, four see Banxico on hold and two see a half point cut.

Banxico surprised analysts on March 9 by cutting its key borrowing rate by 0.5 percentage point, the first adjustment since July 2009.

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