Finance and Economic

Mexico’s central bank will probably reduce its benchmark interest rate for a sixth consecutive month in a bid to revive a shrinking economy plagued by falling exports, plunging remittances and a swine flu outbreak.

The bank’s five-member board, led by Governor Guillermo Ortiz, will cut the overnight rate a half percentage point to 4.75 percent, according to 20 of 22 economists surveyed by Bloomberg. One analyst expects a quarter-point cut and one forecasts a 0.75 percentage point reduction.

Latin America’s second-biggest economy shrank the most since the 1995 Tequila Crisis in the first quarter, industrial output has tumbled for nine straight months and sales of goods abroad have fallen by more than a third in the last year. Policy makers have room for a half-point cut because they remain more concerned about the recession than increases in consumer prices, said Pedro Tuesta, an economist at 4Cast Inc. in Washington.

“They can’t cut a quarter point because the economy is still a wreck,” Tuesta said. “All the data is bad. The recovery isn’t going to be robust.”

Policy makers won’t reduce borrowing costs by more than a half point after saying last month that they may slow the pace of cuts from 0.75 percentage point, Tuesta said. The bank has lowered the overnight rate by 0.75-point for three straight months.

Economy

The economy has plummeted and job losses have accelerated this year as the recession in the U.S., which buys around 80 percent of Mexican exports, saps demand for products.

The economy contracted 8.2 percent in the first quarter from the same quarter a year earlier, prompting Goldman Sachs Group Inc. to forecast that Mexico’s gross domestic product will contract 8.5 percent this year, the most since 1932.

Remittances from abroad, the second-biggest source of dollars coming into Mexico after oil exports, fell a record 19 percent in April. Industrial production in April fell 13.2 percent, the most in 14 years and second-lowest reading since March 1983. Consumer confidence dropped to the lowest level ever in May. Mexican production of cars and light trucks fell 39.4 percent last month from May 2008, the nation’s Automobile Industry Association said no fax cash loans.

The swine flu outbreak in April and May also battered the economy as the government shut schools, restaurants and theaters and foreign tourism revenue plunged. The flu may reduce GDP by 0.5 percent this year, Ortiz said last month.

Inflation

Mexico’s central bank, unlike the U.S. Federal Reserve, has only one mandate: to keep inflation in check.

Still, according to Benito Berber, an economist at RBS Greenwich Capital Markets, consumer prices aren’t a big concern for policy makers with recession choking off domestic demand.

“Inflation is sticky, but who cares,” said Berber, who is based in Greenwich, Connecticut. “The bank should only worry about inflation when it has to do with demand because that is what the rate can affect.”

Ortiz said in a June 11 interview that inflation will slow at a “rapid rate” and that a recent rise in global commodities prices is “less threatening” than when those costs reached their peak. The effect of a weaker peso on prices has mostly ended, he said.

Annual inflation slowed to within the bank’s second-quarter forecast of 5.5 percent to 6 percent for the first time in May as the monthly rate fell the most in two years. Ortiz said inflation will meet the bank’s forecast for the quarter.

The central bank forecasts an inflation rate of as high as 5.25 percent in the third quarter, as high as 4.5 percent in the fourth quarter and as high as 3.5 percent at the end of 2010.

Policy makers will cut borrowing costs to 4.5 percent by the end of the year, according to the median forecast of economists surveyed by Citigroup Inc.’s Banamex unit. BBVA Bancomer SA, Mexico’s largest lender, forecasts the rate will remain at 4.5 percent until the fourth quarter of 2010.

Lower interest rates can help prompt businesses to invest and consumers to buy on credit. Cheaper loans also can spur inflation by strengthening demand.

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