Mexico Bank Will Probably Keep Rate at 8.25% as Peso Weakens

By Jens Erik Gould
Enlarge Image/Details

Oct. 17 (Bloomberg) -- Mexico's central bank will probably leave its benchmark interest rate unchanged today on concerns that a reduction to help a sagging economy would further depreciate the currency and fuel inflation.

The bank's five-member board, led by Governor Guillermo Ortiz, will keep the key lending rate at 8.25 percent today, according to 18 of the 20 economists surveyed by Bloomberg. Two analysts forecasts a decrease of a quarter percentage point.

While a rate cut may help the economy resist a worldwide slowdown and credit crunch, it would work against the bank's efforts to prop up the weakening peso, said Rafael Camarena, an economist at Banco Santander SA. Inflation pressures also haven't abated enough to justify a decrease, he said.

``It wouldn't make sense to cut rates,'' Camarena said in a telephone interview from Mexico City. ``An interest-rate cut could generate more volatility in currency markets.''

The central bank has sold $11.2 billion worth of U.S. dollars since last week and purchased pesos in a bid to stem a rout in the currency. The peso tumbled to a record low last week amid the worst global credit crisis since the Great Depression.

Banco de Mexico may stop spending its foreign reserves to prop up the peso soon, Ortiz said yesterday. He said new purchases wouldn't be as large as last week's interventions.

Banxico, as the central bank is known, raised borrowing costs by 0.75 percentage point this year to the highest level in almost three years. It left rates unchanged in September.

Inflation

The bank will wait to cut interest rates because inflation may accelerate in October after slowing in September for the first time since January, said Sergio Luna Martinez, the director of economic research at Citigroup Inc.'s Banamex unit in Mexico City.

``There will be a jump in inflation in October,'' said Luna Martinez, who predicts the bank will lower the interest rate in November. ``This reinforces the idea that it's better not to change rates.''

Consumer prices rose 5.47 percent in September from a year earlier, slower than August's 5.57 percent pace, as prices for agricultural products fell. Luna Martinez forecasts inflation will quicken to 5.7 percent in October.

In July, the central bank raised its inflation forecasts through 2010 because of higher-than-expected commodity costs. It expects annual inflation to reach as high as 6 percent in the fourth quarter, up from a previous forecast of no more than 4.75 percent.

Weaker Economy

Alfredo Coutino, a senior economist for Latin America at Moody's Economy.com, predicts the central bank will reduce its key lending rate today to mitigate the impact of the global financial crisis on Mexico's economy.

``Mexico is the most exposed economy to the U.S. recession,'' Coutino said. ``If monetary restriction remains for a long period of time, economic activity is going to decelerate more for the rest of the year.''

President Felipe Calderon was forced to revise his 2009 budget proposal this month because of the global credit crisis, lowering forecasts for economic growth and oil prices. He also proposed a stimulus package equal to 1 percent of gross domestic product that includes spending on infrastructure, energy and education to help the economy.

Government reports yesterday showed that the slump in the U.S. economy, the buyer of 80 percent of Mexican exports, is deepening as the financial crisis squeezes companies and consumers out of access to credit. U.S. industrial production sank 2.8 percent in September, the most in 34 years.

The tumble in oil from its record high of $147.27 a barrel in July has also fueled declines in the peso. Crude oil dropped as much as 8 percent yesterday to $68.57 a barrel in New York Mercantile Exchange trading, its lowest price since June 27, 2007. Oil accounts for more than a third of fiscal revenue in Mexico.

To contact the reporter on this story: Jens Erik Gould in Mexico City at jgould9@bloomberg.net.