* Industrial output plummets 4.9 percent compared to last
* 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 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.