Bond Traders Are Signaling Mexico Inflation Slowdown Won't Last

Traders and economists are preparing for faster cost-of-living increases in Mexico even after inflation unexpectedly slowed earlier this month.

The country’s breakeven rate, a bond-market gauge of investors’ expectations for living expenses, has risen 0.14 percentage point to 2.76 percent since March 22. That’s when Mexico reported annual inflation rate unexpectedly slowed to 2.71 percent, holding below the central bank’s 3 percent target.

Mexico’s weakening currency, which has slipped 1.8 percent this year, will cause price increases to accelerate in Latin America’s second-biggest economy this year, prompting the central bank to raise benchmark interest rates, said Alberto Ramos, the chief Latin America economist at Goldman Sachs Group Inc. Last month, policy makers unexpectedly boosted borrowing costs by half a percentage point to 3.75 percent after the currency fell to a record low.

Breakeven inflation rates in Mexico “seem a bit low,” said Ramos, who forecasts inflation will quicken to 3.4 percent this year. “There has been some pressure feeding through. It’s the impact of the pass-through from the currency. It needs to be monitored.”

The peso gained 0.1 percent Monday to 17.5162 per dollar as of 8:53 a.m. in New York.

To contact the reporter on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net. To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net, Melinda Grenier at mgrenier1@bloomberg.net, Lester Pimentel

By: Sebastian Boyd

©2016 Bloomberg News