WRAPUP 1-Mexico 2013 inflation expectations rise, factory activity dips

Mon Apr 1, 2013 5:02pm EDT

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By Alexandra Alper and Michael O'Boyle

MEXICO CITY, April 1 (Reuters) - Analysts surveyed by Mexico's central bank lifted their expectations for inflation this year, hinting at waning confidence in the bank's ability to control inflation after its recent interest rate cut.

In March, Mexico's central bank cut interest rates for the first time in nearly four years to an all-time low of four percent even as inflation was rising.

Policymakers made the cut in a bid to undermine the appeal of peso-denominated debt and cool a surge in the currency that could eventually hurt exporters and drag on growth.

Data later in the month showed inflation jumped above the bank's 4 percent tolerance ceiling in early March, an increase the bank expects will be temporary.

A poll of 33 analysts released on Monday showed annual inflation in 2013 is seen ending the year at 3.75 percent, up from 3.66 percent in the previous poll a month earlier. The latest prediction is above the central bank's 3 percent target but within its comfort zone.

"The deterioration of inflation expectations ... may be reflecting the perception that the (the central bank) turned more inflation dovish following the 50 basis point rate cut enacted March 8," Goldman Sachs economist Alberto Ramos said in a client note.

Central bank board members expressed concerns that capital inflows could grow even higher this year, but the board split over the cut, 4 to 1.

Ahead of the rate decision, Central Bank board member Manuel Sanchez warned a cut would be premature, arguing that both the downward trend in inflation and inflation expectations had yet to be confirmed.

The peso has gained more than four percent this year and hit its strongest in more than 1-1/2 years after the central bank lowered interest rates in a "one-off" adjustment, the bank said.

Optimism about the new government's push to pass long-stalled economic reforms through the country's divided Congress is expected to support further peso gains.

EASING GROWTH

The poll also saw a drop in growth expectations in Latin America's No. 2 economy.

Analysts surveyed expected an expansion by 3.46 percent this year, below a forecast of 3.54 percent predicted in the prior poll.

The Finance Ministry has said it expects Mexico to grow by 3.5 percent this year, down from 3.9 percent in 2012 on expected weakening of U.S. demand for Mexican goods.

Separate data showed Mexican factory activity growth slowed for the third month in a row in March to its weakest pace of expansion since the start of last year.

The HSBC Mexico Manufacturing Purchasing Managers' Index (PMI) dipped to 52.2 in March, its lowest reading in 14 months, down from 53.4 in February, after adjusting for seasonal variation.

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