Mexico Central Bank Unexpectedly Raises Rate to 7.50%

Oct 26, 2007 - Mexico's central bank unexpectedly raised interest rates and said inflation will take longer to retreat than policy makers previously estimated.

The five-member board, led by Governor Guillermo Ortiz, lifted the benchmark rate a quarter percentage point to 7.50 percent, surprising 22 of 29 economists surveyed by Bloomberg. The peso climbed to a three-month high.

Inflation hasn't slowed as quickly as the central bank predicted in May, when it said the rate would fall to 3 percent by the end of next year. Today, the bank revised its outlook to estimate the target won't be reached until the end of 2009 because of rising food prices and higher taxes approved by Congress last month. It also dropped its ``restrictive bias,'' hinting it doesn't intend to follow with more increases.

``They had to show commitment to the target,'' said Alonso Cervera, a Latin America economist at Credit Suisse Group in New York, who predicted the increase correctly. ``It would have been very odd for them to increase their inflation forecast and then not come through with a rate hike.''

The economists who predicted today's increase, such as Cervera, Dresdner Kleinwort's Omar Borla and RBS Greenwich Capital Markets' Benito Berber, said they don't expect the bank to raise interest rates again this year. In today's statement, said the threat to Mexico's economic expansion from a decelerating U.S. economy had increased.

`Preventive'

``Clearly it was a preventive move,'' Borla said.

The decision marks the second time this year the central bank unexpectedly raised borrowing costs in Latin America's second-largest economy. The bank in April also unexpectedly increased its rate by a quarter percentage point.

Mexico's benchmark stock index rose 250.66, or 0.8 percent, to 32,123.6. The peso gained 0.7 percent to 10.7345 per dollar.

A report Oct. 24 showed core inflation rose more than expected in the first half of October because of higher prices for pasteurized milk and tobacco.

Core consumer prices, which exclude fresh food and energy, rose 0.21 percent, more than the median estimate of 0.15 percent in a Bloomberg survey of 18 economists, putting them at 3.87 percent on an annual basis, higher than the 3.5 percent forecast the central bank has for the end of the year.

Core Prices

That report led RBS Greenwich's Berber to change his forecast to predict central bankers would raise to 7.50 percent today. The central bank has missed its 2-to-4 percent inflation target in eight of the past 13 months.

Rising food prices may lead Mexico to suspend import duties on wheat for three months to reduce costs for local food producers, El Milenio newspaper reported Oct. 24, citing Economy Minister Eduardo Sojo.

Rate increases put the central bank at odds with President Felipe Calderon's administration.

Finance Minister Agustin Carstens criticized the bank in April for raising rates, saying it had acted ``prematurely'' at a time of slowing economic growth. In an Oct. 23 interview from Washington, Carstens said Mexico doesn't have an inflation problem and ``there are no underlying inflation pressures.''

Central bankers seemed to disagree with that assessment today in their statement, saying ``greater pressures on food prices and the probable impact of the recently-passed tax reform'' had led to their inflation-outlook change.

Fuel Tax

Congress last month passed tax legislation backed by Calderon that includes a 5.5 percent levy on gasoline that will take effect in January.

Meanwhile, Mexico's economy is expected to slow on falling demand from the U.S. According to the IMF's World Economic Outlook released Oct. 17, Mexico's economic growth will fall to 2.9 percent this year from 4.8 percent in 2007. Growth in 2008 is forecast at 3 percent.

Mexico sold a record $211.9 billion, or about 85 percent of its exports, to the U.S. last year.

Yields on Mexico's 10-year benchmark security have risen 28 basis points since the end of May on concern that U.S. growth will decline as subprime mortgage loan defaults push up borrowing costs.

Today's decision follows months of warnings from policy makers that they were prepared to raise rates should inflation not begin to decelerate fast enough to reach 3 percent by the end of 2008.

`End of the Line'

In May, the same month it introduced its 3 percent forecast, the bank adopted a ``restrictive bias,'' meaning it was more likely to raise rather than cut rates. In subsequent months, central bank surveys showed economists did not believe inflation would decelerate so rapidly.

Inflation will end 2008 at 3.69 percent, according to the average estimate of 33 economists surveyed by the bank between Sept. 24 and Sept. 28.

``In October the Bank of Mexico reached the end of the line,'' said Guillermo Aboumrad, an economist with Banco UBS Pactual in Mexico City, who forecast policy makers would increase borrowing costs today. ``Either they're meeting the inflation targets or they're not.''

Mexico posts 300 mln peso fiscal deficit in August

Sep 28, 2007 - Mexico posted a fiscal deficit of 300 million pesos ($27.4 million) in August compared with a surplus the month before, the government said on Friday.

Budgeted income rose 9 percent over the year-ago period, mostly because of a 9.5 percent rise in tax income unrelated to oil sales, the government said.

Spending in August jumped 29.3 percent in real terms, with more money handed out for pensions, as well as investment in state-oil firm Pemex and agriculture.

In July, the government posted a fiscal surplus of 15.7 billion pesos.

Mexico Holds Rate on Signs of Slowing U.S. Growth

Sep 21, 2007 - Mexico's central bank kept its benchmark interest rate unchanged as a slowing economy in the U.S., the biggest destination for Mexican goods, eased pressure to control rising local food costs.

The five-member board held the benchmark rate at 7.25 percent, matching estimates from 23 of 24 economists surveyed by Bloomberg. The bank maintained a "restrictive bias" that has been in place since May, citing rising food prices and legislation that will introduce a fuel tax.

The U.S. Federal Reserve's cut in borrowing costs to forestall a recession increased concern that a slowdown there will erode Mexico's expansion. Lower U.S. interest rates also make Mexican assets more attractive, potentially strengthening the peso and easing inflation as imports become cheaper.

"The measures taken by the Fed may make it easier for the Bank of Mexico to stay put," said Omar Borla, a senior Latin America economist with Dresdner Kleinwort in New York, in a telephone interview. "The amount of the Fed cut also signals U.S. activity might be slowing more than expected, which would certainly have an impact on Mexico."

Mexico's peso extended gains after the central bank announcement, gaining 0.4 percent to 10.9473 per dollar at 10:14 a.m. New York time.

Future Increase

Mexico's Finance Ministry on Sept. 8 lowered its 2007 growth estimate to 3 percent from 3.3 percent, citing waning demand from the U.S., which buys about 80 percent of Mexico's exports.

A deceleration in the U.S. next year will trim demand for Mexican exports and restrain growth in Mexico to 3 percent even after legislators passed a tax bill aiming to spur economic growth, Shelly Shetty, senior director for sovereign ratings at Fitch Ratings, said yesterday in an interview.

While the bank had reasons to hold rates unchanged today, policy makers said today the inflation outlook has worsened. The bank said it will revise inflation forecasts for the next two years in its quarterly report to be published next month.

"Pressure from food prices has increased more than expected (particularly dairy and wheat)," the central bank said in its statement today. "What's more, we must assess the consequences of the recently approved tax reform."

Banco de Mexico may still have to raise rates again before year-end to reach the bank's inflation targets, said economists such as Borla, Banco UBS Pactual's Guillermo Aboumrad, JPMorgan Chase & Co.'s Alfredo Thorne and Morgan Stanley's Gray Newman.

Rising costs of food staples from tortillas to sugar have pushed inflation to above 4 percent, which policy makers define as the upper limit of their acceptable range, in eight of the past 12 months.

The central bank predicts inflation will fluctuate between 3.75 percent and 4.25 percent during the third quarter before falling to between 3.25 percent and 3.75 percent in the fourth.

Mexico inflation eases in August, still above goal

Sep 7, 2007 - Mexican annual inflation slowed to 4.03 percent in August, but remained above the central bank's target range, and analysts expected to bank to maintain its bias toward higher interest rates.

The central bank said the consumer price index rose 0.41 percent in August, matching the median forecast in a Reuters poll.

Closely watched core inflation, which strips out some volatile food and energy prices, was 0.21 percent in August compared with 0.34 percent in July.

Prices for some foods and vegetables grew less quickly in August than in previous months, the bank said.

Some analysts say that if the U.S. Federal Reserve cuts its benchmark fed funds rate on Sept. 18 in response to a growing credit crunch in the United States, Mexico's central bank might feel less need to maintain a bias toward tighter monetary policy.

But others say possible rises in food and vegetable prices from recent hurricanes, as well as expected higher taxes from a planned fiscal reform, mean significant inflation risks remain.

"I think this means they keep the tightening bias," said Francisco Diez, director of emerging markets trading at RBC in Toronto, after the monthly inflation report came out.

Consumer prices rose 0.42 in July and annual inflation was 4.14 percent.

All economists consulted by Reuters expect the bank to keep its key interest rate steady at 7.25 percent at its monthly monetary policy review on Sept. 21.

Mexico's central bank has held the rate unchanged but maintained a tightening since a surprise 25 basis point hike last April.

The central bank's 12-month inflation target is 3 percent, but it considers inflation up to 4 percent acceptable.

Hurricane Henriette raged over farming states in northern Mexico this week, where a storm last year damaged tomato crops and pushed up prices.

For months, rising prices of fruits and vegetables, as well as high costs for dairy products around the world, have fueled inflation in Mexico.

The August annual rate was in line with the bank's forecast in July that annual overall inflation would be between 3.75 percent and 4.25 percent in the third quarter.

But 12-month inflation should come back down to between 3.25 percent and 3.75 percent in the fourth quarter and 3 percent by the end of 2008, according to the bank.

Mexico's economy expanded 2.5 pct in June

Aug 28, 2007 - Mexico's economy, hobbled in recent months by a U.S. slowdown and less demand for exports, expanded 2.5 percent in June from the same month last year, modestly less than analysts had forecast in a Reuters poll.

Economic activity was up 0.33 percent in June from May, according to the monthly IGAE index, which measures the vast majority of Mexico's economic output.

Analysts in a Reuters poll on average had expected economic activity to grow 2.55 percent in June.

The key industrial sector expanded a scant 0.1 percent in June compared to the same month in 2006, while services grew 3.5 percent and agriculture increased 4.5 percent, the government said on Tuesday.

The Mexican economy grew 4.8 percent in 2006 but is losing steam this year as the United States, the country's main trade partner, suffers from a sluggish economy.

Second-quarter growth in Mexico was 2.8 percent.

A crisis in the U.S. subprime mortgage market that is causing global market volatility and threatening to spread to banks in other countries could further slow the U.S. economy, analysts say.

Mexico holds key rate steady, eyes credit crisis

Aug 24, 2007 - Mexico's central bank held its key overnight interest rate steady at 7.25 percent on Friday, as analysts expected, but cautioned it would act if niggling food prices become a threat to its inflation goal.

But in a hint that it may have eased its bias toward worries about inflation, the central bank warned that the U.S. subprime mortgage crisis could lead to a slower economy in the United States, Mexico's top trading partner. The bank said it took that uncertainty into account in its monthly policy review.

Twelve-month inflation, which has been pushed up by higher fruit, vegetable and dairy prices over several months, is seen on path toward the bank's 3 percent target and should be near that goal by the end of 2008, the Banco de Mexico said.

Still, the future trajectory of food prices remains unnerving and the bank said it is worried that medium-term inflation expectations remain above its target.

"The board will continue to evaluate the balance of risks and will act if its deterioration compromises the inflation objective," the bank said.

UBS economist Guillermo Aboumrad, in a telephone interview with Reuters, said the central bank "is equally concerned with international events regarding credit restrictions and with the pace of world food inflation. It's trapped between two worlds."

A slowdown in the United States would hurt Mexico's economy and put pressure on the Banco de Mexico not to raise rates any further.

Mexico's annual inflation ticked up to 4.10 percent in early August, above the central bank's target range but still within expectations.

The bank said last month it expects annual headline inflation between 3.75 percent and 4.25 percent in the third quarter. But 12-month inflation should come back down to between 3.25 percent and 3.75 percent in the fourth quarter, the bank has said.

The bank did not comment about a possible price spike that could be caused by the implementation of a fiscal reform package being negotiated by the government with lawmakers.

While economists have long encouraged a tax overhaul to improve government revenues, they warn that its implementation could cause inflation as products become more expensive because of higher taxes.

Ruling party and opposition lawmakers say they are close to a deal on a tax reform package, which President Felipe Calderon wants passed soon so it can be included in the 2008 budget.

That might tempt the central bank to raise rates, but uncertainty about the U.S. economy will probably keep it in check for now, some analysts say.

"Barring a major unfavorable price shock in Mexico, a stabilization of (U.S.) credit market conditions seems to be a prerequisite for the central bank to tighten," said Credit Suisse economist Alonso Cervera in a report.

The central bank, which tries to keep annual inflation below 4 percent, surprised financial markets with a 25-basis-point interest rate hike in April. It has kept rates steady since then while warning it would hike if price pressures put its long-term inflation goal in danger.

All economists polled by Reuters had expected the central bank to hold steady on Friday.

Mexico trade deficit $762 mln in July

Aug 23, 2007 - Mexico's trade deficit shrank to $762 million in July, the government said on Thursday, but it was still higher than expected.

Analysts surveyed by Reuters had forecast the monthly trade deficit at $500 million, compared with an $827 million deficit in June.

Exports rose 14.1 percent year on year, of which non-oil exports increased 13.2 percent, the government said.

Imports in July rose 15.8 percent over the same month a year ago. Of that total, intermediate imports climbed 16.4 percent, imports of consumer goods rose 17.1 percent and capital goods imports increased 10 percent.

Mexico foreign investment up 39.2 pct in 1st half

Aug 21, 2007 - Foreign direct investment in Mexico was $13.244 billion in the first half of the year, up 39.2 percent from the same period in 2006, the government said on Tuesday.

The government also increased its estimate for foreign direct investment over the whole of 2007 to $23 billion from $18.3 billion.

The government's previously estimated investment had 2007 foreign direct investment slowing slightly from the $19 billion that investors sank into Mexico last year, when the economy was growing at a faster pace.

Mexico's economy is seen growing about 3.6 percent this year, down from 4.8 percent in 2006.

Mexico industrial output tepid in June

Aug 14, 2007 - Industrial production in Mexico, pinched by a U.S. economic slowdown, rose a tepid 0.1 percent in June compared with the year-ago period, its weakest growth since March.

Industrial output in Mexico was 0.91 percent higher in June than in May, the government said on Tuesday.

Economists polled by Reuters on average had expected 1.7 percent growth, year over year.

Manufacturing, a cornerstone of Mexico's economy, fell 0.30 percent in June over the year-ago period, the government said.

Queretaro-based Tafime Mexico, which makes parts for the U.S. auto industry, has seen its billing fall by half in the past two months and is trying to avoid laying off some of its 135 employees.

"I'm working on preventive maintenance, repairs," general manager Hector Ortiz told Reuters. "If I had 10 machines working, now I have three working."

A slowdown in the United States, which buys almost all of Mexico's exports, is seen reducing Mexican growth to 3.6 percent this year from 4.8 percent in 2006.

The economy is expected to grow only 2.8 percent in the second quarter, according to a Reuters poll of analysts

"June's Mexican industrial production data suggests the economy could pick up less quickly and with greater difficulty than originally expected," Mexico City-based Ixe brokerage said in a report.

The government said mining rose 1.9 percent, of which non-oil production rose 3.7 percent and oil output increased 0.30 percent.

Construction gained 1.1 percent, while utilities rose 2.1 percent, the government said.

Last week, Mexican automakers cut their growth forecasts for production and exports to up to 15 percent from up to 25 percent.

Mexico inflation accelerates to 0.42 pct in July

Aug 9, 2007 - Mexican consumer prices jumped 0.42 percent in July, accelerating from June and pushing 12-month inflation above the 4-percent limit the central bank says is acceptable.

Closely watched core inflation, which strips out some volatile food and energy prices, was 0.34 percent during the month, the bank said on Thursday.

Prices rose 4.14 percent in the 12 months through July.

Analysts polled by Reuters on Wednesday had expected the consumer price index to rise 0.37 percent in July and had forecast a 0.34 percent increase in the core inflation index for the month.

The central bank said last week that annual inflation, as gauged over a 12-month period, could accelerate to above 4 percent during the third quarter before falling below 3.75 percent by year end.

In June the consumer price index rose 0.12 percent, while the core CPI index rose 0.30 percent.

Most analysts expect the bank will leave interest rates unchanged at its next policy announcement on Aug. 24.

But they say recent inflation data could put pressure on the bank to hike interest rates, especially if economists' price forecasts deteriorate.

"There is a risk of expectations being contaminated," said Omar Borla, an economist at Dresdner Kleinwort in New York.

Higher inflation expectations, which have risen in recent months, can act as a self-fulfilling prophecy by prompting companies to raise prices and workers to demand higher wages.