| | |  Business News | July 2008 
Ortiz to Limit 'Contamination' as Mexico Price Pressures Build
 Jens Erik Gould & Yamila Constantino - Bloomberg
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| | Mexico's central-bank governor, Guillermo Ortiz | | |
Mexico's central-bank governor, Guillermo Ortiz, said inflation pressures may be building even as some food and energy prices ease, and signaled the bank will seek to stop rising costs from spreading.
Record prices for commodities are showing signs of leveling off, Ortiz, 60, said yesterday in a Bloomberg Television interview in Mexico City. It will take time for increases in food and energy costs to work their way from producers to wholesalers and consumers, Ortiz said.
"Even if commodity prices stabilize, there is still inflation in the pipeline," Ortiz said. "Our task is to anchor expectations, avoid contamination and this is our primary concern. We will try to make sure that we achieve this objective and pass this inflationary bump with the least collateral damage possible."
Consumer prices in Mexico rose 5.26 percent in June, the first month that annual inflation exceeded the bank's forecast for no more than 5 percent. Inflation in Latin America's second- biggest economy has accelerated for five straight months.
"The contamination so far has been limited, but we cannot take comfort in that," Ortiz said. "We have a global problem, one that is much tougher than anyone thought a year ago."
Banco de Mexico increased its benchmark rate for a second straight time last week to 8 percent, joining more than 20 central banks worldwide that raised borrowing costs this year.
Raise Rates
Mexico's central bank will raise interest rates at least once more this year because inflation is above its target of no more than 4 percent, said Rafael de la Fuente, senior economist for Latin America at BNP Paribas in New York.
Ortiz, who has a Ph.D. in economics from Stanford University and enjoys sailing and scuba diving, is "very concerned about the rising inflation environment in Mexico," Citigroup Inc. Senior Vice Chairman William Rhodes said in a July 22 telephone interview. "He knows that once inflation gets going it's a real problem to get it in line again."
The median estimate of 23 analysts surveyed this week by Citigroup's Banamex unit showed the central bank will raise its key rate by a quarter percentage point to 8.25 percent in August.
Inflation in Mexico may be fueled if the government gradually reduces energy subsidies, said Ortiz, the longest- serving central bank chief of Latin America's eight largest economies. The elimination of that aid, which President Felipe Calderon has said will cost $20 billion this year, would add between 1.5 percentage points and 1.8 percentage points to the inflation rate if it were removed at once, Ortiz said.
Subsidies
"Subsidies are significant and our expectation is that they are lowered over time," Ortiz said. "They create all sorts of distortions."
An agreement announced by Calderon last month to freeze prices of more than 160 food items won't have a significant effect on inflation, Ortiz said.
"The inflation environment is much more susceptible to ignite with the increase in food prices," Ortiz said.
Natural gas for August delivery yesterday touched $9.889, the lowest since April 8. Oil for August delivery dropped $3.09, or 2.4 percent, to settle at $127.95 a barrel in New York. The contract earlier touched $125.63, the lowest since June 5. Corn fell below $6 a bushel for the first time in seven weeks.
Inflation Forecast
The central bank said in its monetary policy statement last week that the inflation outlook had worsened and it will raise its forecasts by an average of about half a percentage point in a quarterly report July 30. Ortiz said yesterday that the bank won't change its inflation target.
"The authorities are on the verge of announcing an inflation path that will be further away from the target for even longer," said Gray Newman, chief Latin America economist at Morgan Stanley in New York. "That is never a good announcement."
The U.S. subprime crisis hasn't damaged Mexico's banks, Ortiz said. "Mexican banks are well capitalized," he said.
Ortiz expects Mexico's second-quarter growth to be "a little bit lower" than 3.7 percent, the seasonally adjusted growth rate for the first quarter.
As deputy finance minister under President Carlos Salinas de Gortari, Ortiz played a key role in Mexico's effort to sell state-owned banks. During the peso crisis of 1995, when soaring interest rates caused defaults on loans and put banks on the verge of collapse, President Ernesto Zedillo tapped Ortiz, by then finance minister, to be in charge of a bailout.
"He's obviously been a very positive force in economic reform over the years in Mexico," said Citibank's Rhodes, who consulted with Ortiz during the crisis. "He plays a very important role within Latin America and also internationally."
To contact the reporters on this story: Jens Erik Gould in Mexico City at jgould9(at)bloomberg.net; Yamila Constantino in New York at yconstantino(at)bloomberg.net. |
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