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Consumer prices spike in August but
inflationary pressures remain subdued.
On 7 September, the Central Bank reported that consumer prices increased
0.59% in August following the deflationary bout in July. Next to some
food items, housing, transportation and electricity rates accounted for
the lion share of the August price hike. As a result, the downward trend
in annual headline inflation observed since March this year came to a
halt, with the rate rising from 5.88% in July to 5.93%. Core inflation,
however, continued to drop for the 28th consecutive month and now
stands at 6.04%. Panellists have once again lowered their year-end
inflation forecasts, down 0.5 percentage points from last month to 5.3%,
which is now more than a full percentage point below the Central Bank’s
official 6.5% inflation target for this year. However, panellists remain
sceptical about the Central Bank’s ability to make further inroads in
bringing down inflation next year in an environment of growing domestic
demand and a weaker Peso. As a result, the Consensus Forecast for
year-end inflation in 2002 dropped just a 0.1 percentage point notch to
5.2%.
Interest rates reached historic low
in mid-August but inflationary spike prompts some upward movement.
The inflationary spike in August has prompted a slight upward movement in
interest rates. As a result, the rate for the benchmark Cetes 28 paper
has risen from the historic low rate of 6.97% on 23 August to 8.75% on 6
September. Further drops in interest rates seem unlikely, since they
would render the Mexican paper unattractive relative to comparable U.S.
Treasury bills. Nevertheless, panellists have lowered their year-end
interest rate forecast to 10.6% from 11.5% last month and expect the rate
to drop further to 9.4% by the end of 2002.
Peso looses some ground amid
concerns about declining capital flows
In August, the Mexican Peso remained relatively stable, loosing just 0.43%
nominally versus the US$. In early September, however, the Peso lost more
ground on some concerns about rising inflation as well as declining
capital flows in the wake of the economic slowdown. On 7 September, the
Peso stood at 9.35 to the US$, a nominal depreciation of 1.5% over the end
of August. Panellists expect the Peso to weaken further, ending the year
at 9.45 to the US$. Nevertheless, this would still represent an annual
appreciation of 2.1% against the US$ in nominal terms. In 2002, the
Consensus expects a nominal depreciation of 5.4% to 9.99 Pesos to the
US$.
Second quarter current deficit lower
than expected and fully covered by capital inflows.
In the second quarter, the current account registered a lower than
expected deficit of US$ 3.4 billion, which remained below US$ 4.7 billion
deficit reported for the first quarter this year. The deficit was also
slightly below the US$ 3.6 billion figure registered in the same period
last year. Capital flows of US$ 4.1 billion were still sufficient to
cover the gap in the current account balance. Nevertheless, flows have
receded notably from the US$ 7.9 billion in the first quarter. As a
result, reserves increased by US$ 695 million in the second quarter,
according to balance of payments data. The annual current account deficit
dropped slightly from US$ 18.4 billion in the first quarter to US$ 18.2
billion in the second quarter, the first drop since the third quarter
1999. Weaker demand for imports should further lower the current account
deficit to US$ 17.5 billion this year, according to this month’s Consensus
Forecast.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Mexico. For more details please click here.
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