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 Business News | June 2008 
Mexico Bank May Keep Rate Unchanged After Accord to Hold Prices
 Jens Erik Gould - Bloomberg
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Mexico's central bank will probably keep its benchmark interest rate unchanged for an eighth month after industry leaders agreed to freeze the price of tortillas, canned tuna, coffee beans and about 150 other items this year.
The five-member board, led by Governor Guillermo Ortiz, will keep the rate at 7.5 percent at today's meeting, according to 16 of 24 economists surveyed by Bloomberg. Eight others expect an increase of a quarter percentage point.
The agreement on prices reached with the Confederation of Industrial Chambers, an umbrella group of industry groups, may have signaled Mexico will use methods other than raising borrowing costs to fight inflation. Central bank policy makers have kept the benchmark rate steady as they weigh the risk of higher consumer prices with slowing economic growth.
"I was always stating that there would be no hike," said Pedro Tuesta, senior Latin America economist at 4Cast Inc. in Washington. "Yesterday's announcement reinforces my case."
The central bank won't increase rates to avoid the risk of further damping economic growth, which slowed to 2.6 percent in the first quarter, said Ricardo Aguilar, an economist at Invex Casa de Bolsa SA in Mexico City. Annual inflation, at the highest in three years, is still within the bank's forecast, meaning there's no need to adjust borrowing costs, he said.
"If inflation is within the range and the growth forecast isn't so good, they don't have a reason to change rates," Aguilar said.
Inflation Rate
Mexican consumer prices rose 4.95 percent last month from a year earlier, the most since December 2004, driven by food, housing and air transportation costs. The central bank in April raised its 2008 inflation forecast, saying prices will climb 4.5 percent to 5 percent on an annual basis in the second and third quarters, and as much as 4.75 percent in the fourth quarter.
Mexico's government says the economy is less vulnerable to a slowdown in the U.S. than it was during the U.S. recession of 2001. Even so, April industrial production fell 0.8 percent when adjusted for seasonal factors, the national statistics agency said June 17.
President Felipe Calderon urged the central bank on June 4 to take into account the spread, or difference, in benchmark interest rates between his country and the U.S. when setting monetary policy. Relatively higher rates in Mexico can strengthen the peso, hurting exporters.
Predicting a Raise
Morgan Stanley, Credit Suisse and Barclays Capital have released reports in the past week predicting that Banco de Mexico will increase its key lending rate by a quarter percentage point today.
"The balance of risks on the inflation front have deteriorated since the central bank's last meeting in May," said Gray Newman, chief Latin America economist at Morgan Stanley in New York, who forecasts a rate increase.
Barclays said it based the forecast on the outlook for inflation, rising global food prices and a June 16 central bank presentation highlighting the importance of its independence.
The accord reached with industry groups on June 18 to maintain food prices also covers wheat flour, tomato sauce and juices. Wheat, corn and rice have risen to records this year because of shrinking global stockpiles and more demand.
Barclays said that the announcement "may pose some risk to our rate hike call, but it does not change our expectation for higher short-run inflation."
Calderon has also tried to fight higher food prices by lifting import tariffs on corn, wheat, rice and beans in May. He eliminated import taxes on nitrogen-based fertilizer, and cut in half the tax on imported powdered milk.
To contact the reporter on this story: Jens Erik Gould in Mexico City at jgould9(at)bloomberg.net |
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