Mexico's Economy, Prices Justify Lowering Rate, Werner Says

By Jens Erik Gould and Carlos M. Rodriguez

Nov. 8 (Bloomberg) -- Mexican Deputy Finance Minister Alejandro Werner said a slowing economy and lower food and commodities prices justify a reduction in the country's benchmark interest rate in the coming months.

While Banco de Mexico should keep in mind that a rate cut may weaken the peso and speed inflation, exchange rate volatility has a smaller effect on consumer prices in Mexico than it did in the 1990s, Werner said in an interview with Bloomberg Television.

``Medium-term inflationary pressures associated with raw- material prices and the situation in the international economy and its impact on the Mexican economy mean interest rates like the one we have now are no longer necessary,'' Werner said.

Inflation accelerated to a seven-year high in October, led by higher costs for electricity, gasoline and food. Economists who cover Mexico predict policy makers will reduce the key lending rate to 7 percent from its current 8.25 percent by the end of 2009, according to the median estimate of analysts surveyed Nov. 4 by Citigroup Inc.'s Banamex unit.

Mexico's government cut its 2009 economic growth forecast to 1.8 percent from 3 percent last month because of the global credit crisis. The central bank kept its benchmark interest rate unchanged at its last meeting as policy makers weighed concerns the economy will slow with predictions inflation may quicken. The next rate decision is on Nov. 28.

The majority of companies that suffered losses tied to currency derivatives when the peso fell the most in 14 years last month have closed their positions or acquired enough dollars to cover their positions, Werner said. Some companies have yet to finalize negotiations with banks and quantify losses, making it difficult to estimate the total losses from derivatives, he said.

Impact `Digested'

``The main impact of these operations on the currency market has been digested,'' Werner said. ``We don't think this will be the cause of any additional surprises.''

Mexico's National Banking and Securities Commission is reviewing whether banks that sold financial derivatives, and companies that bought them, violated regulations on disclosure or other rules. Losses on such contracts caused the bankruptcy of retailer Controladora Comercial Mexicana SAB.

Mexican companies including Grupo Posadas SAB, Alfa SAB and Vitro SAB last month disclosed losses tied to derivatives, which are financial instruments used to hedge risks or for speculation.

To contact the reporter on this story: Jens Erik Gould in Sao Paulo at jgould9@bloomberg.net; Carlos M. Rodriguez in New York at carlosmr@bloomberg.net