August 7, 2012 / 6:28 PM / in 6 years

Mexico price spike temporary, no need to hike: central banker

MEXICO CITY (Reuters) - A spike in Mexican inflation above the central bank’s 4 percent limit is a “mini-bubble” and does not require higher interest rates, central bank board member Manuel Sanchez said on Tuesday.

Other emerging markets such as Brazil have slashed interest rates to counter a global slowdown in economic growth but Mexico has kept its benchmark rate at 4.50 percent since July 2009.

In an interview with Reuters, Sanchez said most of the recent rise in the consumer price index was due to factors such as weather and the exchange rate, which the central bank could not control.

“Yes, the inflation index has experienced a shock ... but the famous core inflation is relatively stable,” Sanchez said.

“We think, and this has been proven up until now, that this is going to be a mini-bubble — we hope that it will be mini — away from the downward trend in inflation and that it will be transitory, and because of this it’s not necessary to adjust monetary policy.”

Investors looking for favorable returns have pushed market interest rates down to historic lows which Sanchez said reflected loose monetary policy in advanced economies rather than local determinants such as inflation.

Analysts polled by Reuters expect inflation to rise to its highest in more than two years in July at 4.42 percent when figures are released on Thursday, after hitting a 1-1/2-year high of 4.34 percent in June.

Sanchez said that weakness in the peso currency was having a “moderate” impact on inflation but that he still saw no price pressures from domestic demand. Policymakers noted in their July meeting that the output gap had closed, which could signal the start of home-grown price risks.

Mexico’s peso has been battered since last year on concerns Europe’s debt crisis could hurt the global economy. The currency’s losses are making imports more expensive even as a weaker peso boosts profits for local exporters.


Sanchez said fears about Europe would likely continue to spur volatility in global markets but he said that there was no sign of worrisome outflows from the local currency bond market.

He said growth in the Mexican economy, which is recovering from a deep recession in 2009, could hold up even in the face of a deeper European crisis.

“I do not see a major recession in the United States, and without that, I do not see Mexico (growth) being affected very dramatically,” Sanchez said, adding that Latin America’s second-largest economy could grow close to 4 percent this year and next if U.S. growth holds up.

Despite wild swings in the peso, Mexico has seen an increase from foreign investors in local-currency bonds and yields have recently touched record lows, flattening the yield curve.

Foreign investors have nearly quintupled their holdings of peso-denominated debt since the end of 2008 as rock-bottom U.S. and European interest rates drove investors to look for higher yields in emerging markets.

Sanchez said further monetary stimulus in the United States would likely push medium- and long-term market interest rates even further down from already historically low levels, which he said are favorable to credit and growth.

“I think we are going to see a further relaxation of monetary policy in the United States and a further flattening in the (Mexican) yield curve,” he said.

Reporting by Krista Hughes and Michael O'Boyle; Editing by James Dalgleish

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