Mexico Leaves Key Rate at Record Low as GDP Rebound Unclear

Mexico’s central bank kept borrowing costs unchanged for a third meeting, saying faster inflation is temporary and the economy has failed to show clear signs of recovery.

Banco de Mexico left its overnight rate at a record-low 3.5 percent, as forecast by all 26 economists surveyed by Bloomberg. Annual inflation slowed last month from an eight-month high in January, when tax increases took effect, and doesn’t face demand-side pressures, the central bank wrote in the statement accompanying today’s decision.

Policy makers last year cut the key rate three times in a bid to jump start an economy where gross domestic product growth has missed forecasts in three of the past four quarters as export growth stagnated. Some economic indicators haven’t shown signs of recovery, with consumer confidence dropping to the lowest level in almost four years and retail sales falling 0.3 percent from a year earlier in January.

“Clear signs of a recovery still aren’t being observed in the different components of aggregate demand,” policy makers wrote in the statement. “In particular, even when public spending has shown more dynamism, exports, as well as consumption and private investment, still don’t show obvious signs of acceleration.”

Peso Strengthened

Mexico’s peso strengthened 0.4 percent to 13.2118 per U.S. dollar at 9:31 a.m. in Mexico City. Yields on Mexico’s fixed-rate government bonds due in June 2016 fell two basis points, or 0.02 percentage point, to 4.07 percent.

Annual inflation will slow to 3.94 percent in the first half of March, below the 4 percent upper limit of the central bank’s target range, according to the median economist projection. Latin America’s second-biggest economy will expand 3 percent to 4 percent this year amid a pickup in the U.S., according to the central bank’s forecast.

“The central bank is comfortably on hold,” Alonso Cervera, chief Latin America economist at Credit Suisse Group AG, wrote in an e-mailed response to questions. “This is occurring in a context of still tentative signs of a recovery and inflation in check after a temporary spike due to new taxes.”

The central bank will monitor the impact of monetary policy in the U.S., the board said in today’s statement. The Federal Reserve on March 19 reduced the monthly pace of bond purchases by $10 billion to $55 billion.

Brazil, India

Mexico’s decision to leave rates on hold contrasts with Brazil, Latin America’s only larger economy, where the central bank raised borrowing costs eight times in the past year to tame inflation that has remained above target. Developing nations from India to South Africa have tightened monetary policy in 2014 as emerging-market stocks dropped the most to start a year since 2008.

Mexico at the start of the year put into place a new 8 percent tax on junk food, a 1-peso-per-liter levy on sugary drinks and increased sales taxes in regions bordering the U.S. The nation in January also cut gasoline subsidies to curb consumption and keep government spending in check.

The pace of consumer price increases will slow toward the 3 percent target, central bank Governor Agustin Carstens said March 11. Annual inflation slowed to 4.23 percent in February from 4.48 percent in January as tomato prices tumbled.

“Inflation looks set to fall below 4 percent in coming months,” Gabriel Lozano, the chief Mexico economist at JPMorgan Chase & Co., wrote in a March 14 research report.

Rate Unchanged

The central bank will keep the interest rate unchanged until the second quarter of 2015, when policy makers are likely to increase them by a quarter point, according to the median forecast of economists surveyed by Bloomberg. They expect inflation to end 2014 at 4 percent and for the economy to grow 3.25 percent.

Mexico’s economy is starting to show signs of improvement, with industrial production in January increasing at double the pace forecast by economists, after missing their projection in the previous two months.

GDP rose 1.1 percent in 2013, when the nation was hit by a housing crisis and delays in public spending after President Enrique Pena Nieto’s administration took office.

Some indicators have continued to show weakness. The government reported on Feb. 21 that the economy grew 0.7 percent in the fourth quarter from a year earlier, half the rate of the three prior months and less than the 1 percent estimate in a Bloomberg survey.


The weakness has been reflected in corporate earnings. Empresas ICA SAB, Mexico’s largest construction company, reported fourth-quarter Ebitda of 1.26 billion pesos ($95.3 million), less than the 1.95 billion peso median analyst forecast. Sales tumbled 16 percent from a year earlier in what Chief Financial Officer Victor Bravo said on a conference call was a “difficult environment for construction in Mexico.”

Cemex SAB, the largest cement maker in the Americas, expects the economy to recover and forecasts “double-digit” increase in volumes in its Mexican infrastructure business this year, Chief Financial Officer Fernando Gonzalez said in a Feb. 6 earnings call.

America Movil SAB’s Chief Executive Officer Daniel Hajj said in a Feb. 12 conference call that after a steep decline in economic activity, “we believe that we have seen probably the worst and that there is some upside to be had by better economic growth.”