Mexico Rate Cut Unlikely as GDP Gains, Central Banker Says

Mexico is unlikely to cut its benchmark interest rate because the nation’s economy is strengthening, said Javier Guzman, a deputy central bank governor and one of five board members who set borrowing costs.

Growth is picking up as the record-low 3.5 percent rate and government spending spur the economy, Guzman said in an interview in Mexico City. Gross domestic product increased 0.8 percent in the third quarter from the previous three months, the national statistics agency reported last week, rebounding from a revised 0.5 percent contraction from April through June.

“The main scenario is for the pickup to continue,” Guzman said in the interview yesterday. “We don’t think that in the foreseeable future there will be additional interest-rate cuts, precisely because of this main scenario. There’s sufficient stimulus in the economy.”

Congress this month approved a 2014 budget deficit of 1.5 percent of GDP, the widest gap in four years, allowing the government to increase spending in a bid to stimulate an economy it estimates will grow 1.3 percent this year, the least since 2009. The central bank has cut interest rates three times in 2013 and signaled that further reductions wouldn’t be advisable.

Peso Strengthens

The peso appreciated 0.4 percent to 13.0722 per U.S. dollar at 1:55 p.m. in Mexico City trading, the most among major Latin American currencies after Brazil’s real. The peso has weakened 1.7 percent this year.

Mexico’s negative output gap will probably narrow next year, and while the inflation rate will probably remain within a “reasonable” range for the rest of this year, policy makers will respond if price gains need to be curbed, Guzman said.

The annual inflation rate in the first half of November rose to 3.51 percent after falling for six straight months. The central bank targets an inflation rate of 3 percent, plus or minus one percentage point.

“At all times we will be working very closely to follow the evolution of the inflation rate and the factors that can affect it, and monetary policy will respond in the case that it should be needed,” Guzman said. “Inflation has behaved better than we had anticipated. Core inflation, which is the best measure of inflation in the medium and long term, has maintained very low levels.”

Tax Overhaul

Core prices, which exclude more volatile energy and farm costs, increased 2.43 percent in the first half of November from a year earlier.

Mexico’s tax overhaul, which includes a junk-food levy passed by Congress last month, will have a “very moderate” impact on inflation, and consumer-price gains will probably slow gradually to about 3 percent in 2015, Guzman said.

Yields on benchmark peso bonds due in 2024 fell five basis points, or 0.05 percentage point, to 6.15 percent today, according to data compiled by Bloomberg. The price rose 0.46 centavo to 130.791 centavos per peso.

Mexico’s financial-system overhaul passed by the Senate on Nov. 26 in a bid to boost bank lending “should be reflected in greater credit growth, which in turn should lead to faster GDP, not just cyclical but long term,” Guzman said.

Guzman, 57, joined the board of Banco de Mexico in February after spending the previous three years as director-general of the Center for Latin American Monetary Studies, an association of regional central banks known as CEMLA.

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