Mexico holds rate, on alert for inflation from tax reform

    Mexico's central bank held its policy rate steady at 3.50 percent, as expected, but said it would remain alert to any impact on inflation from the government's tax reform.
    The Bank of Mexico, which has cut its target for overnight rates three times this year for a total reduction of 100 basis points, also said it would be "vigilant" to the inflationary effects of economic activity and the relative monetary stance of Mexico versus the United States in order to achieve its 3.0 percent inflation target.
    Mexico's headline inflation rate eased to 3.36 percent in October from 3.39 percent in September but picked up to 3.51 percent in early November on a seasonal rise in electricity prices.
    The central bank said inflation was still showing a positive trend and core inflation was near historically low levels of around 2.5 percent. But inflation expectations for the end of 2014 have risen slightly due to the potential impact of changes to taxes, but remain below 4 percent.
    The central bank added that expectations of economic agents for 2015 show that any increase in inflation will be "transient, moderate and will not lead to second order effects."

    For the rest of 2013 and in 2014, the central bank expects inflation to fluctuate around 3.5 percent and then trend downward toward 3 percent by 2015, taking into account the fading impact of any change in inflation from the tax reform and the change in fuel taxes.
    In October Mexico's Congress approved a government bill to raise tax revenue through higher taxes on high income earners and a levy on junk food and stock market gains as part of its overall economic reform that includes the energy and telecommunication industries.
    Mexico's economy rebounded in the third quarter after shrinking in the second quarter, helped by higher exports though domestic demand is mixed with indicators of private consumption and investment not showing clear signs of recovery, the bank said.
    Mexico's Gross Domestic Product expanded by 0.8 percent in the third quarter from the second for annual growth of 1.3 percent, down from 1.6 percent in the second quarter.
    In its latest inflation report, the central bank cut its forecast for 2013 growth to between 0.9 and 1.4 percent from a previous 2-3 percent, down from 2012's 3.8 percent. For 2014 growth is forecast to rise to between 3.0 and 4.0 percent.
    Downside risks to the forecast includes lower-than-expected growth in the United States and market volatility that may affect external financing that could result in fewer resources to the private sector given the expected increase in public sector needs.
    On the other hand, if structural reforms are approved, "economic growth in our country could accelerate without generating inflationary pressures," the bank said.
    There are also downside risks to the global economy due to uncertainty linked to U.S. monetary and tax issues, while the recovery of the euro zone remains weak and growth in emerging economies has slowed, in some cases due to macroeconomic vulnerabilities, the bank said.

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