Mexican Central Bank May Hold Interest Rates as Inflation Slows

- Mexico's central bank will probably keep its overnight lending rate unchanged today after inflation slowed and concern over global economic growth mounts.

The five-member board will hold the benchmark rate at 7.25 percent, according to 24 of 26 economists surveyed by Bloomberg. The bank raised rates once this year, in April, as a ``preventive'' measure.

Policy makers are unlikely to lift borrowing costs because slowing inflation eases concern the bank will miss its target of 3 percent by the end of 2008. The Bank of Mexico is also less likely to raise rates on expectations the U.S. Federal Reserve may be set to lower its benchmark rate.

``Given what policy makers have said about their inflation expectations, it would be inconsistent to raise rates,'' said Rafael de la Fuente, chief Latin America economist at BNP Paribas in New York. ``The international situation will only cement their need to stay on hold.''

The central bank said in a July 31 report that inflation should begin to decelerate from recent highs above 4 percent to between 3.25 percent and 3.75 percent in the fourth quarter. Mexico's inflation slowed in the first half of August on lower prices for fruit and vegetables.

Consumer prices rose 0.20 percent in the first 15 days of the month, decelerating from 0.25 percent in the same period of July, the central bank said yesterday. Core consumer prices, which exclude fresh food and energy costs, rose 0.11 percent, down from 0.20 percent in the previous period.

U.S.

Concern that turmoil in the U.S. housing and credit markets may slow economic growth in world's largest economy mounted in recent weeks. The U.S. buys about 80 percent of Mexico's exports.

The U.S. Federal Reserve on Aug. 17 acknowledged the risk by lowering its so-called discount rate, or what it charges banks for direct loans, by 0.5 percentage point to 5.75 percent. The reduction signals the Fed may cut its target rate from the current level of 5.25 percent on or before its Sept. 18 meeting.

``A lot of this turmoil may end up doing some of the work for the Bank of Mexico,'' said Gray Newman, a senior Latin America economist at Morgan Stanley in New York.

For two months in a row, the Bank of Mexico has said the risks to its inflation target are rising. In May, the bank for the first time said its goal was to reach 3 percent inflation by the end of next year.

Economists covering Mexico, on the other hand, expect inflation will be at 3.53 percent at the end of 2008, according to a survey released by the country's central bank Aug. 1

Risks

Unexpected events ranging from hurricanes that damaged tomato crops to rising international corn and grain prices have caused the central bank to miss its 2 percent to 4 percent target inflation range for seven of the past 11 months.

Any unforeseen event, such as damage from Hurricane Dean, which pummeled Mexico on Aug. 21 and 22, could cause inflation to jump again.

President Felipe Calderon's tax bill, which in draft form proposes allowing states to levy a gasoline tax, could potentially also spur inflation, said Delia Paredes, senior economist with Santander Central Hispano SA's Mexican unit.

``The worries that the central bank has had in the last two months are still present,'' she said.