| | |  Business News | December 2009 
Mexico’s Central Bank Raises 2010 Inflation Forecasts
 Jens Erik Gould & Crayton Harrison - Bloomberg
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December 04, 2009
Mexico’s central bank raised its inflation forecasts for 2010 as income, sales and excise tax increases take effect, which may signal policy makers will increase borrowing costs sooner than analysts forecast.
The bank boosted its inflation forecast for the end of 2010 by as much as 1.75 percentage points. Consumer prices will rise as much as 5.25 percent in the third and fourth quarters of next year, exceeding policy makers’ inflation target of 3 percent, the bank said in a report published on its Web site.
The forecasts helped send the peso higher as traders increased bets that the central bank will have to raise rates sooner than previously forecast to combat inflation.
“They’re preparing the terrain for a hike in 2010,” said Luis Flores, a senior economist at IXE Grupo Financiero SA in Mexico City, who said he may move up his forecast for the bank to raise rates in September. “The numbers mean the bank will have to raise rates soon.”
Economists surveyed by Citigroup Inc.’s Banamex unit had said in a Nov. 19 report that annual inflation will be 4.8 percent at the end of 2010 and that policy makers would begin raising the benchmark interest rate in May of next year.
The currency gained 0.9 percent to 12.7313 per U.S. dollar, from 12.8516 yesterday. The peso has gained 3.8 percent in the past month.
Tax Increases
Lawmakers raised taxes last month to boost revenue amid falling output at the state oil company and the worst recession since the 1930s. The higher taxes, as well as expected increases in prices set by the government for goods such as gasoline, will have a one-time effect on inflation, which will slow again in 2011, central bank Governor Guillermo Ortiz told reporters.
“The economic package includes measures to increase tax collection that necessarily imply an impact on consumer prices,” Ortiz said today in Mexico City. “It’s a temporary increase” in inflation.
Annual inflation will probably end this year below 4 percent, Ortiz said.
Banco de Mexico said in its report that domestic demand will remain weak in Mexico even as the economy improves. The bank maintained its forecast that the economy will grow as much as 3.5 percent next year after shrinking about 7 percent this year. Remittances from Mexicans living abroad will show a moderate recovery next year, he said.
No ‘Strong Recovery’
“The decline is being reversed,” Ortiz said of the economic slump. “We can’t talk about a strong recovery yet.”
Luis Arcentales, an economist with Morgan Stanley in New York, said the bank’s emphasis in its report on weak domestic demand and its comments that the inflationary pressure generated by tax increases will be short lived may signal that the bank is reluctant to raise rates.
“The central bank has pointed out that it considers the tax reform a temporary shock and that it is watching potential second round effects and expectations, suggesting that it is in no hurry to hike rates,” Arcentales said in an e-mail.
Flores also said while the increases in the bank’s inflation forecasts are a sign it may raise borrowing costs sooner, the tone of the bank’s report is “confusing” because it suggests the bank may wait to hike rates.
“In its words, the bank is very dovish, and in its numbers it’s hawkish,” Flores said.
Expiring Term
Asked whether he will remain at the bank after his second six-year term expires this month, Ortiz said he’ll stay if President Felipe Calderon asks him to do so.
“I’m never going to say ‘no’ when it concerns serving my country,” he told reporters.
Speculation is growing among investors, economists and in local newspapers that Calderon may name Finance Minister Agustin Carstens to replace Ortiz. Carstens said yesterday he’s willing to become governor should Calderon nominate him.
Mexico Central Bank Inflation Forecasts 
To contact the reporter on this story: Jens Erik Gould in Mexico City at jgould9(at)bloomberg.net; Crayton Harrison in Mexico City at tharrison5(at)bloomberg.net
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