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Summit News

Mexico: Inflation may rise at year-end

MEXICO CITY (Reuters) - Mexican inflation will likely finish the year at the high end of the central bank’s projected range but core price pressures remain under control, a top central banker said on Friday.

Year-end inflation will likely be pressured by a difficult comparison with the final months of 2009, when food prices declined, Central Bank Deputy Gov. Guillermo Guemez told the Reuters Latin American Investment Summit in Mexico City.

“Remember that annual inflation is compared with the prices of the year before,” Guemez said. “We’ll have to compare against the significant drop in food prices at the end of 2009 that probably will not happen this year.”

The central bank has forecast inflation between 4.75 percent and 5.25 percent in its most recent quarterly inflation report released at the end of April.

Despite the anticipated increase in headline inflation, Guemez said core inflation was still being controlled by the wide gap between Mexico’s economic performance as it emerges from a deep recession and production capacity, as well as by the relative stability of the peso’s exchange rate.

The slump in the value of the peso in the last quarter of 2008 as the effects of the global financial crisis battered emerging markets fueled inflation last year by raising the cost of imported goods.

This week’s market volatility has knocked around 6 percent off the value of the peso but the currency is still up 1.6 percent against the dollar since the start of the year.

However, Guemez downplayed concerns over the recent developments in markets, saying long-term investors had shown no sign they were exiting Mexico.

“We haven’t seen substantial movement in exchange rates or interest rates. Short-term investors averse to risk have left, but the long-term players -- the investors -- remain.”

RESERVES ACCUMULATION

The central bank has been buying dollars since March through an options program designed to smooth out exchange rate volatility and allow it to accumulate $600 million a month, on top of what the country normally earns from oil exports.

Traders have periodically speculated the bank could step up the pace of reserves accumulation. Guemez downplayed the possibility, noting that with reserves currently near $100 billion and Mexico’s continued access to a special line of credit with the International Monetary Fund the bank had more than enough firepower to keep markets steady.

“I don’t see the need to accelerate the accumulation of reserves ... we are more than sufficiently covered.”

Reporting by Jason Lange, Patrick Rucker, Emily Chasan, Jean Luis Arce and Noe Torres; Writing by Emily Chasan and Robert Campbell; Editing by Chizu Nomiyama

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