Mexico holds rate steady, says higher inflation temporary

    Mexico's central bank held its benchmark target for its overnight rate steady at 4.0 percent, saying the recent rise in inflation was temporary and there are no widespread pressures so inflation should resume its downward trend in June and then gradually move toward's the bank's 3.0 percent target.
    The Bank of Mexico, which last month cut its rate for the first time since July 2009 but stressed it was not embarking on a new cycle of easing, said inflation was expected to remain high in April and May and then settle around 3-4 percent during the second half of the year before declining to around 3 percent in 2014.
    A rise in Mexico's inflation rate to 4.72 percent  in the first half of April from 4.25 percent in March and 3.55 percent in February strengthened expectations that the bank would not cut rates further in an attempt to dampen the rise in the peso and temper the inflow of capital.
    Mexico's core inflation rate is expected to remain close, and even below, the bank's 3.0 percent target for most of 2013 and 2014, the central bank said, adding that it would keep a close eye on prices to ensure that there are no second-round effects of the rise in inflation.
    Mexico's economy continues to show signs of weakness, further reducing inflationary pressure, and downside risks to economic activity prevail from the possibility that recent slowdown in the U.S. economy could intensify, the bank said.
    "On balance, significant downside risks to global economic growth prevail," the central bank said, adding that Japan's growth prospects had improved from its "unprecedented monetary and fiscal stimulus" but there are doubts of the effectiveness of its strategy in the medium term given the uncertain transmission channel through which the Bank of Japan is operating.
    With weak global activity and declining international raw materials prices, the inflationary outlook remains favourable in most countries and monetary policy is expected to remain accommodative in advanced and emerging economies and "in some cases additional relaxations could occur," it said.
    Mexico's peso has risen by more than six percent against the U.S. dollar this year and its exports declined by 2.9 percent in February when the economy only expanded by 0.2 percent from January for annual growth of 0.4 percent, according to the national statistics office's IGAE index, which captures most of the components of Gross Domestic Product.
    The low growth in February was caused by a 1.2 percent drop in industrial output while agriculture and services registered higher growth.
    In the fourth quarter of 2012, Mexico's GDP rose by 0.8 percent from the third quarter for annual growth of 3.2 percent, the same rate as in the third quarter.
    Mexico's economy is forecast to grow by around 3.5 percent this year, down from 2012's estimated 3.9 percent.
    Last month the central bank said inflation was expected to rise to around 4 percent in coming months before settling down to a rate of about 3.0 percent in the second half and in 2014.

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