UPDATE 2-Mexico's Carstens says inflation near 4 pct by year-end

Wed Nov 7, 2012 5:19pm EST

Related Topics

* Policymakers ready to increase rates if prices rise again

* Central bank sees growth slowing in coming months

* Sees in inflation "very close" to 4 percent by year-end

By Alexandra Alper and Michael O'Boyle

MEXICO CITY, Nov 7 (Reuters) - Mexico's central bank said on Wednesday that inflation has peaked and will end the year very close to its 4 percent ceiling, but warned it could tighten interest rates soon if price pressures rise again.

Banco de Mexico Governor Agustin Carstens told a news conference he was concerned that a spike in inflation above 4 percent during the last five months would feed into inflation expectations and wage demands.

Tighter borrowing costs would not help ease the impact on inflation from supply-side shocks, such as a drop in egg production after an outbreak of avian flu, Carstens said, but an interest rate rise could prevent wider inflation pressures.

"With tighter monetary policy we will certainly not get the hens to lay more eggs, that is obvious," Carstens said.

He added that a "preventative" increase might be needed if inflation starts to rise again after cooling in early October.

"The idea is to act on the rest of the prices in the economy; keep the rest from rising," Carstens said. "That would be the aim of the preventative action the bank could soon adopt."

Still, Carstens said it was very likely that inflation peaked at the 2-1/2 year high seen in September and he forecast it would end the year "very close" to 4 percent, although he declined to say whether it would undershoot or overshoot that mark.

Data due on Thursday is expected to show the annual inflation rate fell to 4.66 percent in October from 4.77 percent in September.

Yields on Mexican interest rate swaps were little changed as investors stuck to bets that are pricing in about a 75 percent chance of an interest rate rise sometime next year.

"The market had already priced in this tone from Carstens and is inclined toward a hike next year due to these risks to inflation," said Salvador Orozco, a strategist at Santander in Mexico City.

SLOWING GROWTH

Carstens also said an expected deceleration in economic growth in the coming months would also help tame inflation as a global slowdown dragged on Mexico.

Mexico has so far weathered a global downturn better than many economies, buoyed by U.S. demand for its exports.

The bank expects growth of between 3.5 percent to 4.0 percent in 2012, narrowing its previous forecast range. The bank sees growth of 3 percent to 4 percent in 2013, unchanged from its previous forecast.

Carstens warned that Mexico's economy would suffer if U.S. lawmakers fail to turn back from a "fiscal cliff" of about $600 billion in tax increases and spending cuts due in January that could push the United States back into recession.

U.S. President Barack Obama's Democrats failed to win a majority in the lower house of Congress, meaning he must still negotiate with Republicans to roll back the fiscal legislation.

Carstens hoped the call for unity taken by Obama after he won re-election, as well as a similar tone from his opponent, Mitt Romney, could help promote the political consensus needed to avoid the fiscal cliff.

"We hope this call is effective, since it would help the United States, above all, but also the rest of the world," he said.

The central bank held its benchmark interest rate steady at 4.50 percent last month, although policymakers said they could tighten monetary policy for the first time in four years if price pressures do not abate.

A jump in some fresh food prices drove Mexico's annual inflation rate above the central bank's 4.0 percent limit for four months in a row, but the rate fell in the first half of October.

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