Mexico Sees Faster 2014 Inflation as Growth Outlook Improves

Mexican policy makers raised their consumer price forecast for 2014 amid an improved economic outlook, estimating inflation will ease next year.

Inflation rates will remain slightly above 4 percent early this year and for some months in the second half before dropping to the mid-point of the 2 percent to 4 percent target range in 2015, the central bank said in its quarterly inflation report published online today. Policy makers in the previous report forecast inflation near 3.5 percent in 2014.

“Given the recent inflation reading and taking into account the risks identified in this report, the board remains attentive to all pressures that could affect inflation,” Banco de Mexico wrote in today’s report. “New episodes of elevated volatility in international financial markets could generate an exchange rate adjustment that potentially affects inflation.”

The central bank’s five-member board, led by Governor Agustin Carstens, cut interest rates three times last year to a record-low 3.5 percent to boost an economy that it estimates grew at about 1.2 percent, the least since 2009. Inflation has accelerated in the past three months, breaching the target range in the first month of 2014.

“What the central bank is saying is that this year we’ll have the transitory effects of the fiscal impact,” Rafael Camarena, an economist at Grupo Financiero Santander Mexico SAB in Mexico City, said in a phone interview. “What they’re saying is that it’s transitory and basically in line with expectations, so there’s no need to raise interest rates.”

Sapping Demand

The peso fell 0.2 percent to 13.3168 per U.S. dollar at 3:42 p.m. in Mexico City. The currency fell to its lowest level in 18 months on a closing basis last week after the U.S. Federal Reserve said it would reduce the amount of bonds it purchases each month, sapping demand for assets from developing countries. A weak peso can pressure inflation by pushing up import prices.

Inflation will ease to a rate “slightly” higher than 3 percent in 2015, the central bank said today. Consumer prices are under control and remain in line with policy makers’ expectations, Carstens said at an event in Mexico City to discuss today’s forecasts.

“I see a very confident central bank, more optimistic on economic growth and that inflation will return soon to target,” Marco Oviedo, chief Mexico economist at Barclays Plc, said in an e-mailed response to questions. “It reveals an intention to remain neutral.”

Yields on one-year interest-rate swaps fell to 3.99 percent from 4 percent yesterday.

Economic Growth

Mexico’s inflation-linked bonds fell, with yields on inflation-linked securities due in June 2016 increasing two basis points, or 0.02 percentage point, to 1 percent today in Mexico City, according to data compiled by Bloomberg. That’s the highest closing level since July 29.

Banco de Mexico kept the interest rate unchanged at its December and January meetings, saying an increase in public spending will fuel gross domestic product growth. The economy may accelerate next year, climbing 3.2 percent to 4.2 percent after expanding 3 percent to 4 percent in 2014, according to today’s report.

The economy continued to recover late last year and manufacturing may rebound soon as the U.S. stimulates demand for Mexican exports, Carstens said. Mexico’s largest trading partner, the U.S. will see growth accelerate this year to 2.8 percent from 1.9 percent in 2013, according to analysts polled by Bloomberg.

Mexico’s decision to leave rates unchanged last month bucked a trend of monetary tightening in other developing nations after currencies from Argentina to Russia tumbled. India raised interest rates last month along with Turkey and South Africa as emerging-market stocks plunged in their worst start to a year since 2008.

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