Avoiding Brazil-Like Inflation Triggers Delay in Rate Bets: Mexico Credi

Traders are delaying forecasts for interest-rate increases in Mexico for the tenth time this year as slumping U.S. growth and declining food prices restrain inflation.

Yields on 28-day interbank rate futures due in April, known as TIIE, fell 9 basis points this week to 5.11 percent, indicating traders are betting the central bank will wait until that month to increase the key rate from a record low of 4.5 percent. In Brazil, traders are betting the central bank will raise its key rate by 25 basis points, or 0.25 percentage point, to 12.50 percent today, the fifth increase this year.

Mexican policy makers have kept borrowing costs unchanged for 20 straight meetings, the only Latin American country to leave interest rates on hold in the past 12 months. Inflation in Latin America’s second-biggest economy fell to an almost five- year low in June as demand from the U.S., the destination for 80 percent of Mexico’s exports, weakened and fruit and vegetable prices tumbled.

“The factors that could set off inflationary pressures and push the bank to raise rates are dormant,” Eduardo Avila, an economist with Monex Casa de Bolsa SA, said in a telephone interview from Mexico City. “Our recovery, which is tied to that of the U.S., is coming quite slowly.”

Yields on the Mexican government’s peso bonds due in 2024 have tumbled 86 basis points, or 0.86 percentage point, since the end of March, to a seven-month low of 6.97 percent, according to data compiled by Bloomberg.

‘Benign Picture’

Annual inflation in Mexico slowed to 3.28 percent in June and touched a five-year low of 3.04 percent in March. In Brazil, Latin America’s biggest economy, consumer prices rose at an annual rate of 6.71 percent in June, a six-year high.

The costs of food items from peaches to tomatoes in Mexico fell 6.4 percent last month, the most in six years.

“It’s just been a very benign picture,” Alejandro Urbina, who helps manage about $800 million at Silva Capital Management LLC, said in a telephone interview from Chicago. “What’s surprising in the data is how the prices of food have been lower than expected.”

A pickup in Mexico’s economic expansion may spark inflation, according to Benito Berber, a strategist at Nomura Securities Inc. in New York. He estimates the central bank will raise rates as soon as the first quarter of 2012.

Growth in the U.S. will accelerate in the second half of the year as the world’s largest economy shakes off the temporary effects of the run-up in fuel costs and the disaster in Japan, according to Lou Crandall, chief economist of Wrightson ICAP LLC in Jersey City, New Jersey and the top forecaster in a Bloomberg News survey.

Crandall forecasts U.S. gross domestic product expanded at a 1.4 percent annual rate in the second quarter and will grow at an average 3.6 percent pace from July through December.

Inflation Outlook

Industrial production in Mexico rose 4.6 percent in May from a year earlier, more than the median estimate for a gain of 3.7 percent from 12 analysts surveyed by Bloomberg.

“All of the good news in terms of low inflation has been priced in,” Berber said in a telephone interview. “We are now rebounding in terms of manufacturing production.”

The yield gap between Mexican inflation-linked debt due in 2012 and similar-maturity fixed-rated bonds, a gauge of investor expectations for price increases, narrowed to 456 basis points yesterday, according to data compiled by Bloomberg.

The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries widened 2 basis points yesterday to 145, according to JPMorgan Chase & Co.

Default Swaps

The cost to protect Mexican debt against non-payment for five years fell 2 basis points to 115, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

The peso rose 0.5 percent to 11.6578 per U.S. dollar.

Mexican central bankers led by Governor Agustin Carstens said in a July 8 statement following their rate decision there was a “favorable evolution” of inflation and that the economy is expanding at a moderate pace.

The economy may grow as much as 5 percent this year after a 5.4 percent expansion in 2010 that was the fastest in a decade, according to the central bank.

“The bank has had a very dovish tone in its statements,” said Javier Belaunzaran, who helps manage about 40 billion pesos ($3.43 billion) at Interacciones Casa de Bolsa SA in Mexico City. “Inflation has been very controlled here.”