Mexico Holds Benchmark Rate on Signs of Economic Recovery

Mexico kept borrowing costs unchanged at a record low today following two consecutive reductions, as the economy shows the first signs of recovery.

Banco de Mexico kept the overnight lending rate at 3.5 percent, as forecast by all 20 economists surveyed by Bloomberg. The bank had signaled at its previous meeting that it didn’t foresee cutting again, citing plans by President Enrique Pena Nieto to raise spending next year to boost growth.

“Despite the incipient rebound that has begun to register economic activity, there’s still a considerable degree of slack in the labor market and the economy,” the central bank said in a statement accompany today’s decision.

The economy rebounded from a second-quarter contraction to expand 0.8 percent in the third quarter from the previous three months, more than the median estimate of economists surveyed by Bloomberg. While exports are showing greater dynamism, internal demand is giving mixed signals, policy makers said today.

The statement showed “nothing that makes you think they will move in the foreseeable future,” said Delia Paredes, executive director for economic analysis at Grupo Financiero Banorte SAB. The bank is keeping its projection that rates will remain on “indefinite pause,” she said in a telephone interview from Mexico City.

Economic Recovery

“Indicators of private consumption and investment (particularly in the construction sector) don’t show clear signs of recovery. On the other hand, government spending has accelerated,” the policy makers said in the statement.

Congress last month approved a 2014 budget deficit of 1.5 percent of gross domestic product, the widest gap in four years. The move allows 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, led by Governor Agustin Carstens, cut the overnight rate three times this year by a total of 1 percentage point. The last two quarter-point reductions came as inflation slowed in each of the past six months.

Prices rose 3.36 percent in the year through October, down from 4.65 percent in April. While the inflation rate rose to 3.51 percent in the first half of November, the core rate, which excludes more volatile energy and farm prices, dropped to 2.43 percent. The central bank targets inflation of 3 percent, plus or minus one percentage point.

Core inflation, “which is the best measure of inflation in the medium and long term, has maintained very low levels,” Javier Guzman, a deputy central bank governor, said in an interview last week.

Weak Growth

Banxico is “telling us that the economic recovery is still weak,” said Claudia Ceja, a foreign exchange strategist at BBVA Bancomer in Mexico City. “It’s another signal that they will stay on hold for a prolonged period of time,” she said in a telephone interview.

The Mexican peso extended its gains, rising 1.1 percent to 12.9426 per U.S. dollar at 11:02 a.m. in Mexico City after the monetary decision and reports that the U.S. jobless rate fell to a five-year low in November.

Mexico’s central bank estimates that Latin America’s second-biggest economy will grow 0.9 percent to 1.4 percent this year, and that the pace of expansion will pick up to 3 percent to 4 percent in 2014.

The rebound in growth will cause the central bank to leave interest rates on hold until at least 2015 or later, when they’re likely to increase borrowing costs, said Alonso Cervera, chief Latin America economist at Credit Suisse Group AG. Until Carstens oversaw the first of this year’s three reductions in March, Mexico had left borrowing costs on hold since July 2009, the longest for any Group of 20 nation.

On Hold

“The combination of stronger growth and slightly higher inflation will prompt the central bank to stay on hold,” Cervera said in a phone interview. “I’m not saying it will be another four years before we see a move. But could it be one year, two years, three years? It depends. The economy has to be growing at a much faster rate than recently to begin weighing a higher policy rate.”

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