UBS Predicts Rate Cut as Unanimous Calls End: Mexico Credit c.2011 Bloomberg News

Oct. 13 (Bloomberg) -- Mexico’s slowing inflation is prompting Bank of America Corp., Barclays Plc and UBS AG to forecast central bankers will cut interest rates tomorrow, the first predictions for a change in monetary policy since 2009.

The three banks expect policy makers will lower borrowing costs 25 basis points to 4.25 percent while all the 13 other economists surveyed by Bloomberg predict no change. Prior to this week’s meeting, there had been no economist estimate in a Bloomberg survey for a reduction or increase since July 2009. Yields on futures for the interbank rate due in December fell eight basis points this month to 4.68 percent through yesterday, signaling traders expect a cut by year-end.

Economists are growing more confident Mexico will join Brazil, Turkey, Indonesia and Israel in lowering rates after inflation in Latin America’s second-biggest economy fell to an almost five-year low and the U.S. expansion weakened. Mexico has kept benchmark borrowing costs at a record low 4.5 percent since July 2009, making it the region’s only major country to remain on hold over the past year.

“Mexico’s central bank is worried about a U.S. slowdown,” said Rafael de la Fuente, an economist at UBS AG in Stamford, Connecticut. “The inflation rate is practically at the target and that gives them some room to cut rates.”

Yields on Mexico’s peso bonds due in 2024 rose two basis points, or 0.02 percentage point, to 6.57 percent today, paring their decline over the past seven days to 44 basis points, according to data compiled by Bloomberg.

‘No Concern’

Consumer prices rose at an annual rate of 3.14 percent in September, less than economists forecast and half the pace in Brazil. Annual inflation touched 3.04 percent in March, the lowest since May 2006.

The yield gap between inflation-linked debt due in 2013 and similar-maturity fixed-rate bonds, a gauge of investor expectations for annual price increases, has fallen 16 basis points this month to 369.

“The inflation numbers have been very good,” Carlos Capistran, an economist at Bank of America, said in a telephone interview in Mexico City. “There’s no concern on the inflation front. Other central banks are cutting interest rates because of the global economy and that creates some room for an easing in Mexico.”

Mexico’s economic expansion will slow to 4 percent this year from 5.4 percent in 2010, central bank Governor Agustin Carstens said Sept. 8. The U.S., the destination for 80 percent of Mexico’s exports, will expand 1.7 percent this year after growing 3 percent in 2010, according to the median estimate of 91 analysts surveyed by Bloomberg.

Peso’s Slide

A press official at the central bank declined to comment.

The peso has advanced 0.4 percent in the past week, paring its decline over the past three months to 12.6 percent, amid speculation European leaders will manage to contain the region’s debt crisis.

The peso’s plunge, which sent it to a more than two-year low on Sept. 23, will help support Mexican growth, prompting the central bank to keep borrowing costs unchanged tomorrow, said Benito Berber, an economist at Nomura Securities Inc.

“I’m pretty sure they’re not going to cut,” Berber said. “A weaker currency translates into a weaker real exchange rate and that favors exports and discourages imports. Both things help growth.”

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries rose eight basis points to 233 at 11:46 a.m. in Mexico City, according to JPMorgan’s EMBI Global index. The peso fell 0.6 percent to 13.3658 per dollar.

August Minutes

The cost to protect Mexican debt against non-payment for five years dropped 20 basis points yesterday to 150, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Officials at Banxico, as the central bank is known, signaled in the minutes of their August meeting they may lower rates if global growth deteriorates further and inflation slows.

“If you look at the bank’s minutes, you notice a concern,” said De la Fuente at UBS. “Banxico doesn’t want to stay on the sidelines in case a rebound in the economy fails to occur.”

--With assistance from Jonathan Levin in Mexico City. Editors: Lester Pimentel, Jonathan Roeder

To contact the reporters on this story: Benjamin Bain in New York at bbain2bloomberg.net; Veronica Navarro Espinosa in New York at vespinosabloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulosbloomberg.net