Mexico Maintains Interest Rates on Currency Decline

| Oct. 14, 2011 |

Published by Minyanville

Mexico’s Central Bank has kept its benchmark interest rate at 4.5%, as expected by many analysts. With the peso’s dramatic decline of 11% in September, the bank agreed that there was little scope for stimulating the economy with a rate cut. The peso is at around 13.25 to the US dollar and has been up and down this week as investors’ hopes for a resolution in Europe ebb and flow.

The Central Bank also insisted that it would be watching for any inflationary pressure due to the struggling currency, having already said that it was keeping a close eye on global markets. Inflation is low, at 0.25% in September compared to the previous month, the decrease thanks to lower fruit and vegetable prices. Avocado prices alone fell 32%.

This pushes the running 12-month figure to 3.14%, above a 3% target but the second lowest figure this year. However, according to strategist Benito Berber at Nomura, inflation may not continue its decrease thanks in part to the currency’s depreciation.

Berber added, in a note to investors sent out this morning, that he does see the lack of a rate cut as dovish. “We are not saying (the Central Bank) would not lower the policy rate in the future. However, we believe (it) will cut the rate only if the deterioration in the Europe debt crisis is such that the outlook on US economic growth worsens considerably,” he wrote. “In a nutshell, the decision to cut by (the bank) is conditional on the global backdrop.”

With the Central Bank having hinted that there may be a cut in rates if the global markets demand it, Mexican peso bond yields dropped 0.06% to 6.47% around 10am today, according to Bloomberg.

Alberto Bernal, head of fixed-income research at Bulltick Capital Markets, has slashed his 2011 inflation forecast to 2.8%, down from 3.5% after recent figures. “It is very clear that we’re seeing subpar economic growth, and when you have subpar economic growth in your largest trading partner, there are downside risks to your economy,” he told Bloomberg. “This was a major adjustment.”

Mexico in Brief:

Industrial Output Struggles on US Trouble
August industrial output figures showed the biggest drop in two years, down 1.1% from the previous month, thanks to problems in the United States, which consumes 80% of Mexico’s exports. The auto industry, however, has gained from having shifted focus to its Latin American markets. Exports and output both rose 14.2% in September from the previous month. Exports to the US, however, only rose 1.5% on the same period last year.

“The strong auto numbers sort of neutralize the bad news on industrial output,” Berber told Reuters. “The guys who are expecting an interest rate cut are not cheering after these auto numbers.”

President Felipe Calderón is looking to boost the manufacturing sector, having extended tax breaks for exporters for another two years. He focused on the maquiladoras, factories staffed by low-paid workers in tough conditions which account for around 12% of formal private-sector employment in Mexico. “It’s a fiscal stimulus that will give the 6,400 companies in the sector resources they can use to bolster investment and generate more jobs,” he said.

Femsa (FMX), the region’s largest Coca-Cola (KO) bottler, completed its acquisition of rival Tampico this week, in a $702m deal, adding to its purchase of the bottling operations of Grupo Cimsa in an $837 million deal which will give the company control of half of Mexico’s Coke sales before the end of this year.

Presidential Frontrunner Slams Slim
The man likely to take over the presidency of Mexico next July, Enrique Peña Nieto, has set out his plans to bolster the economy, having announced his candidacy for the opposition Institutional Revolutionary Party (or PRI) last month. He attacked world’s richest man Carlos Slim and others in the small number of families that dominate the economy and promised to overhaul regulation to clamp down on the lack of competition in many sectors. Oil output through state oil company Pemex needs to be made more competitive, he said, with its huge pension liability.

One thing the candidate failed to touch upon in any seriousness was the country’s war on drugs. The 44,000 killed during the tenure of Calderón is the primary reason his National Action Party (or PAN) are unlikely to stay in power.