| | |  Business News | August 2009 
Recession Cools Mexico Inflation in Early August
 Jason Lange & Pedro da Costa - Reuters
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August 28, 2009
 |  | The inflation numbers are tamer than expected so that is positive news, but there is a long way to go for the central bank to reach its target.
- Mario Correa |  | | |
Mexico City - Mexican inflation slowed to 5.12 percent in early August, the lowest annual reading in more than a year, as the worst recession in decades kept prices down.
Although the inflation reading was much lower than expected, it remains above the central bank's long-term target, and the bank is seen keeping borrowing costs steady next month.
The 5.12 percent annual inflation level for the 12 months through mid-August was the lowest level since May 2008, the central bank said on Monday.
Inflation was down from 5.54 percent a month earlier.
Mexico's central bank put an end to seven months of consecutive cuts in borrowing costs earlier this month when it held interest rates steady, saying it was extending a pause in monetary policy changes that it announced in July.
With inflation still well above the bank's long-term target of 3 percent, those comments have led some investors to bet that policymakers could keep rates on hold for several months.
"The inflation numbers are tamer than expected so that is positive news, (but) there is a long way to go for the central bank to reach its target," said Mario Correa, economist at Scotiabank in Mexico.
Interest rate futures indicate investors on average think the central bank's next move will be to hike rates, though some economists dissent and say the bank will cut again.
Yields on interest rate futures did not move substantially following the inflation report.
Slammed by a fall in U.S. demand for its exports, Mexico's economy fell into recession last year and nosedived during the first half of 2009. The economy is expected by contract by the most since 1932 this year.
In this environment, it was not surprising to see a sharp jump in Mexico's trade gap in July, although the magnitude of the increase did catch market analysts off guard.
A steep 34.7 percent decline in exports propelled the country's trade gap to $1.28 billion, more than six times the level registered in June and much wider than investors polled by Reuters had foreseen.
PRICES FALL FOR SOME STAPLES
Prices were nearly flat for services over the first two weeks of August and actually fell for plane tickets and for staples like tomatoes and chicken.
Prices rose 0.11 percent during the first half of August, well below the median forecast in a Reuters poll of 0.22 percent.
Annual inflation has been falling most of this year.
The peso currency firmed 0.05 percent on a rebound in euro zone industrial data that added to signs that major world economies are emerging from recession.
The closely watched core consumer price index, which strips out some volatile food and energy prices, also rose 0.11 percent during the first two weeks of the month.
Headline prices had risen 0.20 percent during the first half of July, while core prices rose 0.21 percent during that period.
(Editing by Kenneth Barry) |
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