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 Business News | June 2005 
Central Bank to End Rate Hikes
 Adriana Arai - Bloomberg News
| | Guillermo Ortiz, Governor, Central Bank of Mexico |
The nation's central bankers dropped from their monthly policy statement a sentence that said the country's interest rates should follow rising U.S. rates, signaling they're done raising the benchmark loan rate after 12 increases in 14 months.
The bank's five-member board left the benchmark overnight rate at 9.75 percent at the meeting and removed from their statement a sentence they had included since June 2004: "The board expects that domestic monetary conditions will continue to at least reflect increased tightening" in the United States.
The bank has held the rate at a two-year high of 9.75 percent for three months, halting the increases that began in February 2004.
Economists such as John Welch at Lehman Brothers Inc. said they now expect the Banco de Mexico to start cutting the benchmark rate as soon as next month in a bid to shore up the expansion in Latin America's biggest economy.
"Real interest rates are too high, inflation is behaving well and the economy is growing less than expected," Welch said.
Expectations that Mexico's central bank will cut interest rates have increased demand for fixed-rate bonds, whose price moves inversely to yields. The yield on Mexico's peso-denominated note due in 2014 has been below the overnight lending rate since June 8. Today the 10-year Mexican treasury yield fell 0.1 percentage point to 9.50 percent, the lowest in four months, according to Santander Central Hispano SA.
Banco de Mexico, led by Governor Guillermo Ortiz, almost doubled the overnight lending rate from 5.5 percent in February 2004 in a bid to drive inflation down to its 3 percent annual target. Inflation eased to 4.6 percent in May from 5.4 percent in November. Inflation eased as growth in Mexico slowed to 2.4 percent in the first quarter from 4.9 percent in the fourth.
INVESTMENT DECLINE The rise in interest rates led companies to cut spending on machinery and equipment by 0.4 percent in the first quarter from the fourth, the first decline in 2 1/2 years.
"Why spend money if I can make two, three times inflation just by investing money in government bonds with no risk?" said Robert Payne, deputy chief financial officer of KimberlyClark de Mexico SA."The high level of domestic rates in Mexico definitely makes longterm projects more difficult to justify." Mexico's 12 interest rate increases since February 2004 deepened an economic slowdown driven by weakening demand from the U.S., which buys 85 percent of Mexican exports.
Mexican economic growth slowed to 2.4 percent in the first quarter from 4.9 percent in the fourth.Industrial output growth in March and April averaged 0.3 percent a month, down from the 4.1 percent monthly average over the previous 12 months.
Mexico's jobless rate rose for a fifth straight month in May to 4.29 percent, the longest such streak of increases since at least 1987, a government report showed today.
'LESS OPTIMISTIC' Slowing industrial output growth increases the odds that the Mexican economy may grow less than government growth forecast of 3.8 percent this year, said Alejandro Werner, head of economic planning at the Finance Secretariat.
"The bias is toward something less optimistic, but we still think 3.8 percent is our best projection for this year's growth," Werner said in a telephone interview on June 22.
The central bank's rate increases also lured foreign investors to the country's bond market, helping push the peso to its highest in 21 months this week and further curbing exports. The peso has gained 3.6 percent against the dollar this year, the second-best performance among 16 primary currencies tracked by Bloomberg. Today, the peso rose 0.2 percent to 10.7638 per dollar at 5:35 p.m. New York time.
"The peso at this level means that monetary policy is too tight," said Welch from Lehman in a telephone interview from New York. He expects Banco de Mexico to cut the overnight loan rate to 8.5 percent by yearend. |
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