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Moderate economic growth does not affect inflation

Moderate economic growth does not affect inflation

Posted by Ricardo Vázquez on November 14, 2014

Mexican policy makers were unanimous in their decision to keep the key interest rate unchanged at a record low last month, saying the economy is showing signs of a moderate recovery.

Banco de Mexico left the overnight borrowing rate at 3 percent on Oct. 31, a move forecast by 26 out of 27 economists surveyed by Bloomberg. One predicted a quarter-point reduction.

Policy makers are struggling to slow above-target inflation without damping an economy that grew less than analysts estimated in seven of the past nine quarters. While a report last month showed Mexico again expanded less than forecast in August, the annual inflation rate in October climbed to 4.3 percent, the highest level since January.

“Inflation pressures from aggregate demand have not been registered,” the central bank said today in the minutes of its Oct. 31 meeting. “Despite the recovery in economic dynamism in the second quarter of 2014 and the first months of the third, the weakness the economy showed since mid-2012 means that conditions of slack remain.”

The peso strengthened 0.4 percent to 13.5480 per U.S. dollar at 9:30 a.m. in Mexico City. The yield on Mexico’s fixed-rate government peso bonds due in 2024 rose 0.01 percentage point to 5.94 percent.

The central bank has cut interest rates by 1.5 percentage points since March 2013 to bolster growth. Its next move will be to raise rates by a half point in the third quarter of next year as the U.S. tightens monetary policy, according to the median forecast in a Bloomberg survey.

Inflation Outlook

Annual inflation will slow from about 4 percent at the end of 2014 to near the central bank’s 3 percent target by the middle of 2015 as the effects of this year’s higher taxes fade and gasoline price increases diminish, the central bank said in the statement accompanying the Oct. 31 rate decision.

Decreasing prices for telecommunications services or lower-than-expected growth stemming from recent social unrest could lead inflation to ease faster than projected, although a further weakening in the peso or a minimum-wage increase could also spur consumer prices, the bank said.

Inflation will end 2014 at 3.9 percent and slow to 3.51 percent next year, according to the median forecast of economists surveyed by Bloomberg. The economy will grow 3.75 percent next year, up from 2.5 percent this year, they estimated.

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