| | |  Business News | August 2008 
Mexico Bank Raises Inflation Forecasts Through 2010
 Jens Erik Gould & Hugh Collins - Bloomberg
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Mexico's central bank raised its inflation forecasts through 2010 because of higher-than-expected commodity costs, increasing speculation policy makers will again raise the country's benchmark lending rate.
Annual inflation will reach as high as 6 percent in the fourth quarter, up from a previous forecast of no more than 4.75 percent, the bank said in a statement today. Inflation in the third quarter will be as high as 5.75 percent, the bank said.
"This means tighter monetary policy," said Rafael de la Fuente, a senior Latin America economist at BNP Paribas in New York. "If inflationary expectations are rising, the central bank will have to act."
Inflation in Latin America's second-biggest economy has accelerated for five straight months, forcing the bank to raise its benchmark lending rate at its past two meetings in a bid to slow consumption. The bank said today it will continue to use monetary policy to anchor inflation expectations.
"This revision is due, first and foremost, to rising international commodity prices," the bank said in its second- quarter report. The increases were "much stronger than anticipated in the futures markets at the end of the last quarter."
Subsidies
Mexico's peso strengthened 0.3 percent to 10.0189 per dollar at 4:43 p.m. New York time. It has advanced 8.8 percent this year.
Central bank Governor Guillermo Ortiz said today in a news conference that the government will gradually reduce fuel subsidies, meaning gasoline prices will rise. The government hasn't confirmed a plan to reduce the subsidies, which President Felipe Calderon has said will cost about $20 billion this year.
Consumer prices rose 5.37 percent in the first half of July from a year earlier on higher costs for tomatoes, tourism packages and electricity. Banco de Mexico estimates average annual inflation of 5 percent this year, Ortiz said.
The central bank said inflation will remain above its goal of 3 percent until at least the third quarter of 2010. The bank had previously expected to reach its target by the end of 2009.
Still, Ortiz said that global prices for raw materials are unlikely to accelerate and that the bank foresees a "more favorable" global inflation environment in 2009. These factors, along with a U.S. slowdown that Ortiz said is likely to last until next year, mean the bank sees "the light at the end of the tunnel" in terms of inflation, Ortiz said.
Food, Energy
Ortiz said the impact of rising food and energy costs on other areas of the economy has been "limited" and that mid-term inflation expectations remain "stable." He added that Mexico's consumer prices are rising slower than in many other emerging- market countries.
Ortiz said in a July 22 interview with Bloomberg Television that higher costs for food and energy are still working their way from producers to wholesalers and consumers.
"There are still latent inflationary pressures from the previous rises in commodity prices," the central bank statement said.
Banco de Mexico increased its benchmark rate this month to 8 percent, joining more than 20 central banks worldwide that raised borrowing costs this year.
Growth Forecast
The bank also lowered its 2008 growth forecast for a third time this year to 2.25 to 2.75 percent from 2.4 to 2.9 percent. Banco de Mexico estimates gross domestic product expanded about 3 percent in the second quarter, less than the seasonally adjusted rate of 3.7 percent in the first quarter, Ortiz said.
"We expect this moderate slowdown to continue in the third and fourth quarters," Ortiz said in an interview with Radio Formula today.
The bank said that Mexico will create 370,000 new jobs in 2008, less than the 530,000 it forecasted in its last report.
Ortiz also said that money transfers from Mexicans working abroad fell 2.2 percent in the first half of the year as the U.S. slump cut jobs in the construction industry, the largest employer of Mexican workers in the U.S. Remittances will decline between 2 percent and 3 percent this year, Ortiz said.
"I'm surprised they haven't fallen more because of the disaster in the U.S. construction industry," the central bank chief told Radio Formula.
Mexico Central Bank Inflation Forecasts
• 2008 3Q | Most recent forecast - 5.25%-5.75% | Previous forecast - 4.50%-5.00%
• 2008 4Q | Most recent forecast - 5.50%-6.00% | Previous forecast - 4.25%-4.75%
• 2009 1Q | Most recent forecast - 5.25%-5.75% | Previous forecast - 3.75%-4.25%
• 2009 2Q | Most recent forecast - 4.50%-5.00% | Previous forecast - 3.50%-4.00%
• 2009 3Q | Most recent forecast - 3.75%-4.25% | Previous forecast - 3.00%-3.50%
• 2009 4Q | Most recent forecast - 3.50%-4.00% | Previous forecast - 3.00%-3.50%
• 2010 1Q | Most recent forecast - 3.50%-4.00% | Previous forecast - 3.00%-3.50%
• 2010 2Q | Most recent forecast - 3.25%-3.75% | --
To contact the reporter on this story: Jens Erik Gould in Mexico City at jgould9@bloomberg.net; Hugh Collins in Mexico City Hcollins8(at)bloomberg.net |
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