Reuters: US Dollar Report: WRAPUP 1-Mexico central bank seen downplaying rate cut chance

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WRAPUP 1-Mexico central bank seen downplaying rate cut chance Jun 7th 2013, 05:01 Fri Jun 7, 2013 1:01am EDT * Interest rate decision due 0900 local (1400 GMT * Benchmark interest rates seen on hold at 4.0 percent * May inflation, due 0800, seen accelerating to 4.67 pct By Michael O'Boyle MEXICO CITY, June 7 (Reuters) - Mexico's central bank is expected to back away on Friday from previous talk it could lower interest rates further as a spike in consumer prices persists and a deep slump in the peso threatens to fan inflation fears. The Banco de Mexico is likely to hold its benchmark interest rate steady at 4.0 percent when it announces its rate decision at 0900 (1400 GMT), according to all 16 analysts polled last week by Reuters. Data due earlier on Friday is expected to show annual inflation accelerated in May, climbing higher above the central bank's 4 percent limit for the third month in a row. However, the central bank had kept the door ajar in April for a possible cut if foreign investment inflows accelerated. After a 7 percent slump in the Mexican peso last month, policymakers could flag concerns about the risk to inflation should foreign investors pull out of Mexican assets and weaken the currency further, pushing up import prices. "They cannot continue with an easing bias," said Rafael Camarena, an economist at Santander in Mexico City. "Inflation has rebounded more than was expected. " Policymakers will likely turn from concerns about a too-strong local currency toward the risk of sharp capital outflows as investors look to tighter U.S. monetary policy, analysts said. Mexico's peso was hammered in May along with other emerging market assets as convictions grew that the U.S. Federal Reserve could begin easing back its monetary stimulus later this year, a move that would strengthen the dollar. The Fed's easy money policies helped spur a record tide of foreign investment into Mexican peso bonds, driving up foreign holdings to around 1.75 trillion Mexican pesos ($136 billion), or nearly 40 percent of total outstanding government peso debt. INFLATION SPIKE Recent public transport price hikes are adding to inflation pressures from a spike in fresh food prices, which could upset central bank forecasts for inflation to ease towards its 3 percent target in the second half of 2013. Mexico's annual inflation rate is seen edging up to 4.67 percent in the 12 months through May, from 4.65 percent in April, according to the median of a Reuters poll. Consumer prices in May are seen falling 0.30 percent in the poll, as summer electricity subsidies kick in. But core inflation was seen up 0.21 percent. Mexico's central bank cut its benchmark rate for the first time in nearly four years in March to a new record low in what was seen as a bid to reduce the appeal of local assets. Key monthly U.S. payrolls data due on Friday at 0730 Mexican time could either deepen or dampen concerns that the Fed may cut back on its monetary stimulus later this year. If the data is much stronger than expected, it could push markets to price in tighter policy from the Fed. That could drive the peso past the key 13-per-dollar level, spur a wave of stop-loss selling and raise concerns about higher import prices. Markets leapt in May to begin pricing in a withdrawal of Fed stimulus later this year, driving up yields on Mexican bonds and interest rate swaps and wiping out bets on another 50 basis point cut by Banxico around September. However, if the U.S. economy is seen weakening, it could push back expectations the Fed will trim its monthly bond purchases. That could revive bets of another rate cut in Mexico if the peso gets back into an appreciation trend. "If the global environment stabilizes and the inflation trajectory moves down to where they expect it to move down to, then I think that the balance of risks for them on the monetary policy side is for them to cut," said Michael Gomez, co-head of emerging markets at bond giant PIMCO, in a telephone interview on Wednesday. Link this Share this Digg this Email Reprints

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