Mexico keeps rate steady, warns of hike if inflation rises

    The central bank of Mexico left its benchmark interest rate unchanged at 4.5 percent, as widely expected, but warned that it may have to raise rates if inflationary pressures continues to build.
    Banco de Mexico said it still believes the current level of interest rates would ensure that inflation declines towards the bank's target on a permanent basis, but over the next few months inflation is expected to continue to remain at levels above 4 percent.
     Earlier today, the statistics agency reported that Mexico's annual inflation rate accelerated to 4.57 percent in August, up from 4.42 percent in July. Inflation has been rising since May due to higher vegetable and fruit prices from drought in northern Mexico and in the United States. An outbreak of avian flu and a recent increase in grain prices has also pushed up prices
    Banco de Mexico targets inflation of 3 percent, plus/minus one percentage point. The bank has left its target for the overnight interbank interest rate unchanged since July 2009.

    The central bank said it still considers the effect of these supply shocks on inflation to be temporary but "given the intensity of the shocks that have affected food prices and the potential remains for further turbulence in international financial markets, it is considered that the risks to inflation in the near term continued to rise."
    These risks, however, are balanced out by deflationary conditions in most advanced economies and slow growth in most emerging economies, which tends to reduce inflationary pressures, the bank said.
    "Going forward, the Board will continue to monitor developments in all the determinants of inflation, since the behavior of these might make it advisable to adjust upward the benchmark interest rate, Banco de Mexico said in a statement.
    The bank struck a somber tone in its global economic outlook, saying downside risks to global growth have increased due to moderate U.S. growth and uncertainty regarding the fiscal tightening in 2013 along with slowing growth in many emerging markets.
    Slower global growth should lead to lower inflation in 2012 and 2013 compared with 2011 and the bank said there was an underlying deflationary condition in several advanced economies despite the recent rise in some commodities, which is expected to only have a temporary effect on inflation.
     Economic activity in Mexico continues to show a positive trend, the bank said, adding that manufacturing exports and domestic demand continue on an upward trend, which is almost closing the output gap.
    "As for the balance of risks to growth in the Mexican economy, it is considered they continued to deteriorate, reflecting the intensifying downside risks to the global economy and in particular for the U.S. economy," Banco de Mexico said.
    Mexico's economy expanded by an annual rate of 4.1 percent in the second quarter, down from 4.5 percent in the first quarter.
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