Mexico under pressure

Mexican inflation was less than expected, but inflation pressures are on central bank to make a rate cut in hopes of protecting Mexico's economy.

The first two weeks of 2008 showed less than expected increases in inflation in Mexico. This is good news to many that thought the rates would be significantly higher. Consumer prices here rose 0.27 per cent, as reported by Mexico's central bank. Core inflation rose 0.25 per cent during the same amount of time.

Does this signal the ability for the Mexican central bank to cut its benchmark interest rate? Many economists predict that this is just what will happen.

According to the Mexican central bank governor, Guillermo Ortiz, the potential movement forward is not as clear as many think. In comments made at the Davos, Switzerland convention, Ortiz said (as reported by Bloomberg News,) "The outlook for Mexico is complex. On one hand, there's the risk that the economic growth slows in Mexico, which is natural if the US economy slows. On the other hand, we still have latent inflation pressure."

Mexico has seen some important improvements over the last month in terms of increasing home values and a stabilizing economy. In fact, while the US housing market is struggling, the Mexican market, just over the boarder even, is booming.

There are many things holding back the central bank from cutting rates including the unknown effect of taxation here as well as the US slowdown. Ortiz did make one important comment regarding a possible US recession. "It is premature to talk about a recession. In the case that a recession occurs, it will be less pronounced and of a shorter duration."

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