Reuters: US Dollar Report: UPDATE 2-Mexico keeps interest rate on hold, softens hike threat

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UPDATE 2-Mexico keeps interest rate on hold, softens hike threat Nov 30th 2012, 16:19 Fri Nov 30, 2012 11:19am EST * Banco de Mexico keeps key rate unchanged at 4.5 pct * Central bank omits word "soon" on threat to hike rate * Says reduction in inflation has been significant MEXICO CITY, Nov 30 (Reuters) - Mexico's central bank backed away from a threat to raise interest rates "soon" and left its benchmark rate at 4.5 percent on Friday, as expected, predicting inflation would fall to within its comfort zone by the end of the year. In a statement accompanying the decision, the Banco de Mexico said a recent fall in inflation had been "remarkable" and price risks had eased even as the growth outlook worsened. The Banco de Mexico said in October it might raise rates "soon" for the first time in four years if price pressures did not abate, surprising investors with its tough tone. Since then, inflation has eased from a 2-1/2 year high of 4.77 percent in September to 4.6 percent in October, although it still marked five straight months above the central bank's 4.0 percent ceiling. "If new shocks to inflation arise, even if they seem to be transient, and the trend change in overall inflation and core inflation is not consolidated, the board believes that it could be appropriate to raise the benchmark interest rate," the central bank said, removing the warning of "soon" from its statement. The yield on the two-year Mexican interest rate swap , the most popular instrument to express a bet on monetary policy, fell by the most in four months as investors cut bets on an interest rate hike before mid-2014. "All of the hawkish tone that suggested an imminent hike is gone, it's very neutral," said Benito Berber, an economist at Nomura Securities in New York. He said the bank kept language about a possible rate hike in the statement to signal to the market that they were serious about shocks in inflation, even though these were reversing. The Banco de Mexico has not moved rates since mid-2009 as the economy recovered from a deep recession. Prices have been under pressure from spikes in the cost of eggs and chickens following an outbreak of avian flu in western Mexico. But inflation eased further in early November, backing the view of central bank governor Agustin Carstens that price rises have peaked in Latin America's second-biggest economy. GROWTH UNDER PRESSURE The central bank also has less room to raise rates since the economy is losing steam in the second half of the year, notching 3.3 percent growth in the third quarter as the global slowdown finally begins to bite. The finance ministry is forecasting a moderate expansion of 3.5 percent to 4.0 percent for the whole of 2012. Concerns have risen this month that U.S. lawmakers could fail to stave off impending tax increases and spending cuts set to take effect next year. The so-called "fiscal cliff" could drag down growth in the United States and hit demand for Mexican exports, 80 percent of which are destined for U.S. markets. In its statement, the central bank predicted that inflation would end the year below 4.0 percent and would ease toward its 3.0 percent target in 2013, helped by the global slowdown's drag on Mexican growth. "Today's announcement confirms what we had in mind, which is that you cannot move the benchmark rate when you have a global economic scenario which is so uncertain," said JP Morgan economist Gabriel Lozano. The central bank said last month one of its main inflation worries was a recent pick-up in salaries, where growth accelerated to close to 5 percent annually in September. In October, wage growth eased to 4.23 percent and policymakers backpedaled, saying there was no evidence of generalized pressures from a rise in inflation expectations or from the labor market. Link this Share this Digg this Email Reprints

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