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 Business News | March 2007 
Mexico Keeps Rates Steady, Warns Hike Possible
 Greg Brosnan - Reuters
Mexico City – Mexico's central bank held its benchmark overnight interest rate steady at 7 percent Friday but warned it could soon raise rates even if inflation cools in coming months.
A drop in 12-month core inflation in the first two weeks of March persuaded the bank to hold off from tightening monetary policy for the mean time.
But it said in a statement on Friday it could still raise rates soon.
“Even if inflation follows its currently projected course in the coming months, an additional deterioration of the balance of risks ... would lead to a monetary tightening,” the central bank said.
Core inflation was 0.16 percent in the first half of March, according to figures released on Thursday, which brought 12-month core inflation down to 3.87 percent from 3.95 percent at the end of February.
The bank said it expects headline inflation to stay between 4 and 4.5 percent until the third quarter of the year but end 2007 between 3.5 percent and 4 percent.
Central bank governor Guillermo Ortiz echoed those comments in a television interview Friday.
Demand bottlenecks for basic foodstuffs including corn tortillas have kept inflation near or above the upper limit of the bank's 2-4 percent target range for several months.
The bank said in its statement that having inflation above 4 percent for a prolonged period would increase the risk it would affect people's expectations of where inflation was heading.
Rising inflationary expectations tend to push prices even higher, as businesses raise prices in anticipation.
The peso currency (MXN-) (MEX01) was largely unaffected following the announcement, trading at 11.008 per dollar, up 0.07 percent for the day. Analysts were split, however, on whether the bank had adopted a stricter tone on inflation.
“Banxico has upped the hawkish tone,” said Pedro Tuesta, an analyst at 4Cast.
Beat Siegenthaler, senior strategist at TD Securities, said in a research note, that “last month's statement had surprised on the hawkish side.”
“But today's was once again more relaxed, in line with Banxico's long-held optimism that the current inflation spike will remain temporary,” he said.
“We stick to our view that rates will remain unchanged throughout the year,” he wrote. “In fact, if global risk appetite continues to thrive and the U.S. slowdown remains benign, rate cuts in (the first half of 2007) are not out of the question.”
Lenders Urged to Pass on Savings
Adriana Arai - El Universal
Regulators will review rules in the latest bid to reduce costs.
The nation´s top two financial regulators said they would review banking regulations to create savings that lenders can pass on to their customers, part of an effort to boost lending.
Finance Secretary Agustín Carstens and Central Bank Governor Guillermo Ortiz made the pledge in speeches Friday at a conference in Acapulco. They also urged banks to keep reducing fees and to cheapen credit to help spur growth in Latin America´s second-largest economy.
The high cost of credit relative to nations with similar levels of development is in part due to excessive regulations and lack of disclosure, they said.
"One must recognize that the bigger spread between borrowing and lending rates isn´t exclusively attributable to lack of competition," Ortiz told an audience of bankers gathered at the beach resort. "An important part of this spread reflects higher risks, higher regulatory and execution costs and a smaller scale of operations."
Ortiz said Banco de México will seek to further increase competition in the banking industry to help reduce loan costs and broaden the access to credit in Mexico´s US$877 billion economy. While fees and interest on loans have declined, he said they remain high.
The central bank governor signaled he may use regulatory power he won in 2004 to require banks to further reduce credit- and debit-card processing fees. Mexican banks, under pressure from the central bank, have agreed to cut such charges by US$200 million annually since 2004.
"Despite the decline, interchange fees in Mexico remain above those observable in a large number of countries for which information is available," he said.
The average fee Mexican banks charge one another to process credit card transactions is 1.84 percent, compared with 1 percent in Spain, 0.5 percent in Australia, 1.1 percent in the U.K. and 1.5 percent in the United States, Ortiz said.
The comments cap two years of central bank pressure on the banks to boost lending and cut service fees and interest on loans. Carstens joined the effort today, adding that domestic credit to private companies and individuals equals only 14 percent of gross domestic product in Mexico, compared with 63 percent in Chile and 97 percent in South Korea.
President Felipe Calderón, while praising the effort to increase lending, urged the banks in a speech Thursday to offer more and cheaper loans to small and medium-sized companies because most of the loan growth in the past two years was for consumers. Calderón also said more competition was needed in the banking industry to reduce the cost of loans.
Bank lending to consumers and private companies has risen in excess of 30 percent annually since 2004, in part because Ortiz has exposed lenders to public pressure by saying they didn´t lend enough and charged fees in Mexico that were as much as 10 times greater than those they levied in their home countries.
The Mexican Banks Association pledged Thursday to quadruple lending to private companies and individuals during the next six years by 3.3 trillion pesos of loans in the period. That would be enough to lift the ratio of bank lending to the private sector to 28 percent of gross domestic product from 14 percent in 2006, according to the association.
Mexican banks said they are cutting fees and interest on loans.
The six biggest banks are on average charging less than they were two years ago for 10 out of 16 services and for three out of five types of loans. |
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