Friday, October 26, 2012

Mexico holds rate, but warns of hike if inflation rises again

    Mexico's central bank held its benchmark interest rate unchanged at 4.50 percent, betting that inflation has peaked, but warned that it would quickly raise interest rates if there was another spike in inflationary pressure, even if it were temporary.
    Banco de Mexico, which also warned last month that it may have to raise rates if inflationary pressures grew, said downside risks to the global economy continued to rise and lower economic activity worldwide and an expected fall in commodity prices should lead to a further loosening of monetary policy in many advanced and emerging economies.
    Mexico's inflation rate eased slightly in early October to an annual rate of 4.6 percent, the national statistics agency said this week, fanning hopes in financial markets that inflation had peaked and the central bank would keep rates on hold today.
    In September  inflation hit a rate of 4.8 percent, up from 4.6 in August and the highest level in 2-1/2 years. It was the fourth month in a row that inflation exceeded the central bank's target ceiling.
    Banco de Mexico targets inflation of 3 percent, plus/minus one percentage point and has left its target for the overnight interbank rate unchanged since July 2009.

    Bad weather and an outbreak of avian flu has pushed up food prices in recent months, but the central bank considers the rise in inflation to be temporary, saying inflation should have hit its highest level in September.
    The bank said it expects no real second-round effects on other prices from the rise in food prices, that inflationary expectations remain anchored and that the peso would appreciate following the further monetary easing in the United States.
   "Inflation is expected to decline further in the coming months to be located very close to 4 percent by the end of the year and to resume a trend converging to 3 percent in 2013," the central bank said.
    "However, if there are persistent shocks to inflation, even if they appear to be transient, and changes in the overall trend of inflation and core inflation are not confirmed, the board believes that it would be appropriate to carry out an adjustment and raise the benchmark interest rate in order to strengthen the anchoring of inflation expectations, prevent contagion to the rest of the price formation process in the national economy and not compromise the convergence of inflation to the 3 percent target,"it added.
    With the global economy still losing momentum and uncertainty about the U.S. fiscal adjustment,  Banco de Mexico said the balance of risks to Mexico's economy had continued to deteriorate. But economic activity continued to grow, albeit at a slower pace, and the labor market was recovering.
    Mexico's economy expanded by an annual rate of 4.1 percent in the second quarter, down from 4.5 percent in the first quarter.  The central bank forecasts growth of 3.25 to 4.25 in 2012 and 3 to 4 percent next year.


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