Mexico Leaves Rate at 8.25% Amid Inflation Concerns

By Jens Erik Gould and Hugh Collins

Oct. 17 (Bloomberg) -- Mexico's central bank kept its benchmark interest rate unchanged today as policy makers balance concerns the economy will slow amid a worldwide credit crunch with predictions that inflation may accelerate again.

The bank's five-member board, led by Governor Guillermo Ortiz, left the key lending rate at 8.25 percent. The global credit crisis has ``intensified notably,'' in recent weeks, the central bank said in a statement posted on its Web site.

``Financial market volatility continues at extremely high levels,'' the statement said. ``The impact on emerging economies has been particularly intense.''

While lower borrowing costs may help soften the impact of the worldwide credit crisis on a sagging economy, policy makers kept rates steady because a cut would further weaken the currency and spur inflation, said Luis Flores, an economist at IXE Casa de Bolsa SA in Mexico City.

``Mexican inflation still hasn't peaked,'' Flores said. ``The central bank doesn't want to lower rates while inflation is accelerating; it would send mixed signals to the market.''

The decision matched forecasts by 18 of 20 economists surveyed by Bloomberg. Two analysts forecast policy makers would decrease rates by a quarter percentage point.

The central bank said that the world economic slump, and particularly the slowdown in the U.S., was hurting Mexico's economy. Still, it expects inflation this year to stay within previously announced guidelines. In July, the central bank forecast annual inflation may reach as high as 6 percent in the fourth quarter.

Inflation Battle

Banxico, as the central bank is known, has raised the benchmark rate by 0.75 percentage point this year to the highest in almost three years, in an effort to battle inflation hovering near a 5-year high. The bank left rates unchanged in September.

Inflation will quicken to 5.7 percent in October, according to a forecast by Sergio Luna Martinez, the director of economic research at Citigroup Inc.'s Banamex unit in Mexico City.

Consumer prices rose 5.47 percent in September from a year earlier, slower than the 5.57 percent pace in August, as prices for agricultural products fell.

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

The central bank has sold $11.2 billion since last week to stem a rout in the peso, reducing its near-record foreign reserves. The currency tumbled to a record low last week as investors pulled out of riskier assets amid the worst global credit crisis since the Great Depression.

Peso Rout

A rate cut would work against the bank's efforts to prop up the weakening peso, said Rafael Camarena, an economist at Banco Santander SA.

``An interest rate cut could generate more volatility in currency markets,'' he said.

Slowing economic expansion is a concern in Mexico. President Felipe Calderon revised his 2009 budget proposal last week because of the 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.

The central bank may keep rates unchanged this year until inflation starts to fall, then cut rates in 2009 to boost Mexico's sagging economy, said Bertrand Delgado, a Latin America economist with New York-based IDEAglobal Inc.

``The economy is deteriorating quite rapidly,'' Delgado said. ``I'm expecting 150 basis points of cuts in 2009, most of them in the first half.''

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

To contact the reporter on this story: Jens Erik Gould in Mexico City at jgould9@bloomberg.net; Hugh Collins in Mexico City Hcollins8@bloomberg.net