Mexico Central Bank Sees Economic Pickup Without CPI Pressures

Mexican policy makers were unanimous in their decision to leave interest rates unchanged this month, with most saying the economy showed signs of picking up without pressuring inflation.

Banco de Mexico left the overnight borrowing rate unchanged at 3 percent on July 11, a move forecast by all 23 economists surveyed by Bloomberg.

The board, led by governor Agustin Carstens, had unexpectedly reduced borrowing costs by half a point in June, the latest of four cuts in 15 months to add stimulus to an economy where growth missed analyst forecasts in seven of the past eight quarters. While the economy is recovering, the output gap is likely to remain negative until the end of next year, according to the minutes released today.

“What is clear is that it was really a one-off rate cut” in June, Marco Oviedo, chief economist for Mexico at Barclays Plc, said in a telephone interview. “I don’t see an additional one.”

The peso maintained its gain after the minutes were released, strengthening 0.2 percent to 12.9381 per U.S. dollar at 9:30 a.m. in Mexico City. The yield on Mexico’s fixed-rate government peso bonds due in 2024 fell 0.01 percentage point to 5.63 percent.

“Most board members indicated that the pace of expansion for the Mexican economy can be expected to strengthen in the second half of 2014,” the central bank said in the minutes.

Growth Forecasts

The central bank had reduced its growth forecast for this year in its May 21 quarterly inflation report to between 2.3 percent and 3.3 percent from a previous estimate of 3 percent to 4 percent after the U.S. economy shrank in the first quarter. After last month’s rate cut, Carstens said policy makers may need to lower their expectations again because expansion in the first quarter was less than projected.

The inflation rate climbed to 4 percent in the first half of July, reaching the upper limit of the central bank’s target range. The bank said in today’s minutes that inflation will probably end the year below 4 percent and near 3 percent in early 2015, when the country changes the way it prices gasoline. The bank targets inflation of 3 percent, plus or minus one percentage point.

Inflation had slowed to 3.5 percent in April from an eight-month high of 4.48 percent in January as the effect of new taxes implemented in January waned. The annual rate is now picking up again amid improving economic performance and comparisons with smaller price increases a year ago.

Economic Policy

President Enrique Pena Nieto has said Mexico needs to expand faster than the 2.6 percent average of the past two decades. He has pushed through a raft of legislation, from opening the oil industry to more private investment to spurring competition in banking and telecommunications.

The government also raised spending by 13 percent in the first five months of 2014 from a year earlier and plans to run a budget deficit of 1.5 percent of gross domestic product for the year, the largest gap since 2010. The economy grew 1.1 percent last year, the least since 2009.

Mexico’s exports have recovered from a decline at the start of the year, growing at least 4 percent from a year earlier in each month from February through June after dropping 0.9 percent in January. The economy in the U.S. is forecast to have expanded 3.3 percent in the second quarter after shrinking 2.9 percent in the first three months of the year amid harsh winter weather, according to the median projection of economists surveyed by Bloomberg.

While economists surveyed by Bloomberg forecast Mexico will grow 2.7 percent this year, down from 3.4 percent at the start of the year, they expect growth to accelerate to 3.8 percent in 2015, according to the median projection.

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