Mexico Sees Inflation in Target Range as Outlook Deteriorates

Mexican policy makers said inflation will end the year below the upper limit of the central bank’s target range as the impact of tax increases that boosted consumer prices in January proves short-lived.

Banco de Mexico’s board was unanimous in keeping the overnight borrowing rate unchanged at a record-low 3.5 percent on Jan. 31, as forecast by all 23 economists surveyed by Bloomberg, according to minutes of the meeting published today. While some board members said a Jan. 1 tax increase could spur inflation more than expected, the bank said it sees the rate slowing to less than 4 percent by the end of this year and to just above their 3 percent goal in 2015.

The annual inflation rate jumped to an eight-month high of 4.48 percent in January, fueled by tax increases on goods from soda to dog food. Although the impact of the higher levies will probably be contained, Banco de Mexico will monitor inflation pressures and act if needed in order to meet their consumer price index goal, according to the minutes.

“All board members held that the current monetary stance is appropriate, although one member made it clear that the deterioration in the balance of risks for inflation registered recently could be reflected in a toughening of the posture at the margin,” the central bank said in today’s minutes.

The central bank’s five-member board cut interest rates three times last year to a record-low 3.5 percent to boost an economy that it estimates grew 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.

‘Slightly Hawkish’

The central bank will probably leave rates on hold this year as growth recovers and inflation abates, according to the median forecast of economists surveyed by Bloomberg.

“The takeaway is that the board is neutral to slightly hawkish,” Benito Berber, a strategist at Nomura Holdings Inc., said in an e-mailed response to questions. “The board will increase the policy rate if inflation expectations get contaminated.”

Most board members said possible new bouts of international financial-market volatility could spur a weakening in the peso, which could have an impact on inflation.

The peso rose 0.1 percent to 13.2539 per U.S. dollar at 10:25 a.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 further 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.

Yields on one-year interest-rate swaps fell one basis points to 3.95 percent today from 3.96 percent yesterday.

Banco de Mexico has kept the interest rate unchanged at its past two meetings, saying improved U.S. growth will help spur Mexico’s economic expansion. Growth will accelerate next year, climbing 3.2 percent to 4.2 percent after expanding 3 percent to 4 percent in 2014, according to the Feb. 12 inflation report.

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