Reuters: US Dollar Report: REFILE-UPDATE 2-Mexico inflation rises in early May, peso impact eyed

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REFILE-UPDATE 2-Mexico inflation rises in early May, peso impact eyed May 24th 2012, 16:11 Thu May 24, 2012 12:11pm EDT * Annual inflation accelerates to 3.71 percent * Power subsidies drive headline prices down * Weak peso may drive prices higher By Michael O'Boyle MEXICO CITY, May 24 (Reuters) - Mexican annual inflation rose in early May and the threat that a sharply weaker peso could fan consumer prices higher will likely keep the central bank from cutting interest rates this year. Annual inflation accelerated to 3.71 percent in the first half of May from 3.41 percent at the end of April, the national statistics agency said on Thursday. While in line with expectations, the jump pushed inflation closer to the central bank's 4-percent limit for acceptable price increases. Policymakers have kept benchmark interest rates on hold at 4.5 percent since mid-2009. Analysts say currency weakness has kept Mexico from following Brazil's move to slash borrowing costs in order to cushion the economy from the global impact of a recession in Europe. Mexico's peso spiked past 14 per dollar this week, heading toward a multi-year low, and policymakers are eyeing the risk that a prolonged period of currency weakness could drive up import prices and fuel inflation. "As long as this situation persists, it diminishes the chances of a cut," said Banamex analyst Arturo Vieyra. "This increase in May marks, for us, the start of an ascending trend in annual inflation." Banamex projects annual inflation will climb to 4.2 percent in the third quarter before cooling back to 3.7 percent by the end of the year. Mexican interest rate swaps were little moved by Thursday's data. PESO PRESSURE Consumer prices in Mexico slipped 0.48 percent in the first half of May, compared with a 0.47 percent dip expected by analysts. The temporary effect of the renewal of government electricity subsidies drove the drop. Core prices, which strip out volatile factors like energy costs, were up 0.14 percent in May, compared with a 0.11 percent rate forecast in the Reuters poll. Mexico's peso has slumped about 10 percent since mid-March to hit its weakest since November, triggering the first central bank dollar auction since 2009. Data suggested that peso weakness since last year has been feeding into inflation. Core merchandise prices rose at a 3.09-percent annual rate, compared to a 2.39 percent rate in early May 2011. The data did not register the impact of the sharp losses in the peso since last month, reflecting instead a rebound seen in the first quarter, said Italo Lombardi of Standard Chartered in New York. "We continue to see a pretty benign inflation scenario in Mexico," he said. Core services prices rose at an 2.66 percent annual clip in the first half of May, underscoring the recovery of domestic demand that could drive inflation higher in the coming months. The central bank this month revised up its growth outlook for 2012 to as high as 4.25 percent on stronger domestic demand and healthy exports to the United States, which buys nearly 80 percent of Mexico's exports. Link this Share this Digg this Email Reprints

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