Mexico Central Bank Maintains Benchmark Rate at 4.5%
Mexico’s central bank left its benchmark interest rate unchanged for a second month on an improved economic outlook and said future decisions may depend on the inflationary impact of fiscal legislation in Congress.
The bank’s five-member board, led by Governor Guillermo Ortiz, held the rate at 4.5 percent, matching the forecasts of all 19 economists surveyed by Bloomberg. The bank cut borrowing costs at its first seven monthly meetings of 2009, lowering the rate by 3.75 points from 8.25 percent at the end of 2008.
The central bank may raise borrowing costs in the first quarter of next year if it sees signs that changes to tax laws approved by lawmakers are fueling inflation, said Pedro Tuesta, senior economist for Latin America at 4Cast Inc. in New York. The bank also said future decisions would depend on the economy.
“If there’s an impact that substantially modifies inflation, they may have to think about raising rates,” Tuesta said in a telephone interview. “They probably won’t do anything until they see the actual impact in February or March.”
On Sept. 8, President Felipe Calderon proposed tax legislation as part of his 2010 budget proposal that would increase income, corporate and sales taxes in a bid to offset diminishing oil revenue and prevent a credit-rating reduction.
Tax Proposal
The proposal calls for imposing a new 2 percent sales tax that would be used to fight poverty. The income tax rate for high-earning individuals as well as corporations would also rise to 30 percent, before dropping to 29 percent in 2013 and returning to 28 percent in 2014.
Calderon’s economic package, if approved by lawmakers, would add less than 1 percentage point to the inflation rate, Finance Minister Agustin Carstens said Sept. 9.
“You have higher taxes, and that should increase prices,” said Benito Berber, an economist with RBS Securities Inc. in Stamford, Connecticut. “It’s going to be inflationary.”
The government also said this month it plans to gradually raise gasoline and diesel prices as it did before it suspended increases in January.
The bank may raise rates as early as November if the government’s plan to boost fuel prices and increase taxes spurs inflation, said Mario Correa, an economist at Grupo Financiero Scotiabank in Mexico City.
“Inflation hasn’t ceased to be a concern,” Correa said in a telephone interview. “It’s still well above the official target.”
Inflation Outlook
The annual inflation rate fell to 5.08 percent in August, the lowest level in more than a year, as costs declined for tourism packages, local telephone services and avocados.
The central bank forecasts inflation at between 4.75 percent and 5.25 percent in the third quarter, and between 4 percent and 4.5 percent in the fourth quarter. Its inflation target is 3 percent. The government forecasts annual inflation will be 4.3 percent at the end of this year.
Banco de Mexico said in a statement accompanying its decision today that the economy will improve in the second half of the year after a “highly severe” contraction in the first half.
“The most recent indicators for industrial production, employment and consumer confidence indicate that the economy touched bottom and is beginning an expansionary phase,” the bank said.
Mexico’s $1.09 trillion economy contracted 10.3 percent in the second quarter and job losses accelerated as the recession in the U.S., which buys about 80 percent of Mexican exports, sapped demand for its products.
The central bank forecasts the economy will shrink as much as 7.5 percent this year, which would be the biggest contraction since the 1930s.
Auto Production
The recession in Latin America’s second-largest economy is easing on restoration of credit, rising auto output and growing consumer demand in the U.S, Deputy Finance Minister Alejandro Werner said yesterday. Industrial production fell 6.5 percent in July, which was less than the 9.1 percent forecast by economists in a Bloomberg survey.
“All indicators point toward a bottoming of the economy in the second quarter,” Berber said. “There’s no reason to continue cutting.”
At 4.5 percent, the key lending rate is the lowest since Ortiz began targeting the overnight lending rate in 2005. Previously, Banco de Mexico implemented monetary policy by targeting the money supply through a system known as the “corto.”
Lower interest rates can help prompt businesses to invest and consumers to buy on credit. Cheaper loans also can spur inflation by strengthening demand.