| | |  Business News | March 2009 
Mexico Reports Highest Core Inflation in Seven Years
 Jens Erik Gould - Bloomberg
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Mexico reported the fastest annual core inflation in more than seven years last month, possibly limiting the central bank’s room to lower the benchmark interest rate.
Underlying inflation, which excludes some fresh food and energy costs, was 5.78 percent in February, the highest since November 2001, the central bank said today. Overall consumer prices rose 0.22 percent from a month earlier and 6.2 percent from a year earlier, in line with economists’ forecasts.
The 31 percent drop in the peso over the past six months is keeping inflation above 6 percent and will keep the central bank from cutting borrowing costs by more than a quarter percentage point this month to spur the economy, said Jimena Zuniga, a Latin America economist at Barclays Capital in New York.
“This limits the speed at which the bank delivers rate cuts, but it won’t stop the rate cuts entirely,” said Zuniga, who forecasts the bank will cut rates by a quarter-point this month.
A weaker currency can make imports more expensive and fuel inflation. Lower lending rates can help spur demand across the economy by reducing the costs of borrowing, prompting businesses to invest and consumers to buy on credit.
Central banks in Colombia, Chile and Brazil have all cut rates by at least 1 percentage point this year in a bid to boost economic growth. Mexican policy makers have trimmed borrowing costs by 0.75 point so far this year.
Key Lending Rate
February’s annual inflation was the slowest in four months as costs fell for tomatoes, electricity and air transport. It was in line with the central bank’s forecast of no higher than 6.25 percent for the first quarter.
The central bank will reduce the key lending rate by a quarter-point this month, according to the median forecast of economists surveyed March 5 by Citigroup Inc.’s Banamex unit.
The bank last month trimmed the benchmark interest rate by a quarter-point to 7.5 percent. The move was less than economists forecast as a weakening peso and above-target inflation limited the room available to policy makers to lower borrowing costs.
“The higher-than-expected core inflation reading is not a good sign,” Rafael de la Fuente, senior economist at BNP Paribas SA in New York, said in a report. “This does not bode well for a bold move by the central bank in its next policy rate meeting.”
Mexico’s economy contracted 1.6 percent in the fourth quarter. The central bank forecasts gross domestic product will shrink as much as 1.8 percent this year. Mexico’s economy may be in a “difficult situation” for the rest of 2009, Finance Minister Agustin Carstens said March 4.
Mexico’s peso fell 1.4 percent to 15.4135 per dollar as of 1:19 p.m. in New York.
To contact the reporter on this story: Jens Erik Gould in Mexico City at jgould9(at)bloomberg.net. |
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