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WRAPUP 1-Mexico industrial output plummets, cenbank worried on growth
May 10, 2013 / 3:46 PM / 4 years ago

WRAPUP 1-Mexico industrial output plummets, cenbank worried on growth

* Industrial output plummets 4.9 percent compared to last year

* Fall is largest annual decline since October 2009

* Central bank sees downside growth risks

By Alexandra Alper and Michael O'Boyle

MEXICO CITY, May 10 (Reuters) - Mexican industrial output dropped by the most in more than three years in March and central bankers pointed to downside risks to economic growth, backing bets on another interest rate cut.

Data on Friday showed industrial output fell 4.9 percent in March from a year earlier, pulled down by Easter holidays cutting into production and confirming expectations that Mexico's growth slowed sharply in the first quarter.

At their interest rate meeting two weeks ago, most Banco de Mexico policymakers agreed downside risks to growth prevailed, largely due to weakness in the United States, Mexico's main trading partner, minutes of their discussion showed.

The majority of the five board members also saw no generalized price pressures and were optimistic a recent spike in inflation, which hit 4.65 percent in April, would not lead to knock-on effects in the broader economy.

The peso fell by the most in three weeks and analysts said the weak industrial numbers and dovish tone to the minutes were in line with expectations the central bank would cut rates from the current 4.0 percent later in the year. Markets are pricing in a 25-basis-point cut by September.

"We see ... most of the board members arguing that there are still significant downside risks to growth," said Banorte-Ixe economist Delia Paredes.

"And although there was an intense discussion around the theme of inflation convergence, the truth is that they are in agreement that the shocks are temporary and on the supply side."

The central bank aims for annual inflation of 3 percent, plus or minus one percentage point. It expects inflation to come in between 3 and 4 percent in the second half of the year.

But the minutes showed one board member argued that inflation shocks were becoming a permanent event and noted that his vote against the central bank's 50-basis-point rate cut in March was proved correct. Manuel Sanchez had argued before the meeting that a cut would be premature.


Friday's figures showed industrial output also shrank month-on-month, down 0.3 percent adjusting for seasonal factors, although the key manufacturing sector expanded 0.19 percent.

Nomura economist Benito Berber said the weak print was in line with economic growth of just 0.6 percent in the quarter from a year earlier, lower than the finance ministry's estimate of 1 percent growth. Growth figures are due on May 17.

"This means the output gap is now running negative. This opens the door to rate cuts of at least 25 basis points in the (second half of) 2013," Berber wrote in a note to clients.

U.S. manufacturing growth slowed further in April as the sector expanded only modestly, adding to signs the economy cooled as the second quarter got underway.

Solid U.S. demand supported Mexican factories amid sluggish global growth last year, allowing Latin America's No. 2 economy to notch 3.9 percent growth in 2012, but the pace of expansion is seen slowing to 3.5 percent this year.

Higher taxes in the United States and the $85 billion in across-the-board U.S. government spending cuts that took effect March 1 may weigh on American demand for Mexican goods.

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