Mexico Central Bank Keeps Its Rate Unchanged at 4.5%
Mexico’s central bank kept its benchmark interest rate unchanged for the first time in eight months today and said it will “extend the pause” in borrowing costs amid an economic recovery.
The bank’s five-member board, led by Governor Guillermo Ortiz, held the rate at 4.5 percent, matching the forecasts of all 23 economists surveyed by Bloomberg. The bank had cut borrowing costs at seven previous meetings this year, lowering the rate by 3.75 points from 8.25 percent at the end of 2008.
Policy makers voted to pause as Mexico is showing some signs of recovery from its deepest economic slump in at least three decades, said Francisco Diez, director of currency trading at RBC Capital Markets. The language in today’s statement signals the bank will hold rates for the rest of 2009, he said.
“They are optimistic things will improve, but cautious about weakness in the labor market,” Diez said from New York. “By saying they will extend the pause, they’re saying they may hold until next year.”
After last month’s quarter-point cut, Banco de Mexico said it planned to pause amid signs of economic recovery.
“The board has decided to extend the pause announced in the last press release,” the bank said in today’s statement.
Mexico’s peso strengthened 0.45 percent to 12.8280 per U.S. dollar at 3:35 p.m. New York time.
Economy
The bank said in its statement that the economy will improve in the second half of the year after it shrank 10.3 percent in the second quarter. The contraction in the three months through June was the biggest quarterly decline in gross domestic product since at least 1980, according to data compiled by Bloomberg.
Auto production figures showed “an important increase” in July, bank policy makers said. Output of cars and light trucks fell 25 percent in July from a year earlier, compared with a 48 percent decline in June from the same month in 2008.
A recovery in employment will be gradual and will depend on an improvement in the global economy, the statement said.
“The weaknesses in the economy won’t be as severe as they were in April and May, so it’s not necessary to cut rates,” said Luis Flores, senior economist at IXE Grupo Financiero SA in Mexico City.
Retail sales fell 5.1 percent in June from the same month a year earlier, the country’s statistics agency said today how to get a free credit report. Economists expected a 7.2 percent decline, according to the median of 14 forecasts in a Bloomberg survey.
Record Low
At 4.5 percent, the rate is the lowest since Ortiz began targeting the overnight lending rate in 2005. Previously, Banco de Mexico implemented monetary policy by targeting the money supply through a system known as the “corto.”
Lower interest rates can help prompt businesses to invest and consumers to buy on credit. Cheaper loans also can spur inflation by strengthening demand.
Mexico’s economic slump deepened in the second quarter and job losses accelerated as the recession in the U.S., which buys about 80 percent of Mexican exports, sapped demand for its products.
Latin America’s second-biggest economy will contract the most this year among the region’s largest economies, Claudio Loser, former Western Hemisphere director for the International Monetary Fund, said on a conference call yesterday.
The central bank forecasts GDP will shrink as much as 7.5 percent this year, which would be the most since 1932. Brazil’s economy will only contract 0.34 percent this year, according to a survey by that country’s central bank.
Inflation
Inflation has slowed according to forecast and will continue to do so, the bank said today. The annual rate fell to 5.44 percent last month from 5.74 percent in June, the lowest in a year.
The central bank forecasts inflation of no more than 5.25 percent in the third quarter, slowing to as low as 4 percent by the end of the year. The bank’s inflation target is 3 percent by the end of 2010.
A widening fiscal deficit may lead the government to increase costs for public services such as electricity and water, which would fuel inflation, said Alejandro Ascencio, an economist at Bursametrica Management in Mexico City.
Morgan Stanley said in a report this week that the government would have to boost gasoline and diesel prices as much as 15 percent next year to cover an expected revenue shortfall through higher fuel prices, assuming oil prices of $60 a barrel.
That would add 0.6 percentage point to annual inflation, putting the rate at about 4.5 percent by the end of 2010, the report said.