WRAPUP 3-Mexico inflation cools, Brazil hotter in March

* Mexico annual inflation lowest in nearly five years

* Brazil inflation rate nears central bank limit

* Latin America’s big two economies with different worries
(Adds detail and link to Peru central bank decision)

By Patrick Rucker and Luciana Lopez

MEXICO CITY/SAO PAULO, April 7 (Reuters) – Inflation
figures from Latin America’s two largest economies underscored
the contrasting outlooks for policymakers in Brazil and
Mexico.

Brazilian price growth neared the top of the central bank’s
target range in March, data showed on Thursday, while inflation
in Mexico slowed more than expected.

Key economies in Latin America including Brazil have pushed
interest rates higher in recent months to cool growth and quiet
inflation. But Mexico has kept rates steady since mid-2009 as
the economy recovers slowly from recession.

That difference means that while policymakers in Brazil
fret about when to raise borrowing costs and whether such a
move will draw more speculative capital, Mexico’s central bank
is having no trouble keeping borrowing costs low as the economy
expands.

“It’s a trend that we’ve seen for a while, where Brazil’s
central bank is behind the curve and Mexico’s central bank is
ahead of the curve,” said Siobhan Morden, head of Latin America
Strategy at RBS Securities.

The near-term consequence for Brazil is that investors will
continue to want higher returns for parking their money in
Latin America’s largest economy, said Enrique Alvarez, head of
Latin American research at IDEAglobal in New York.

“It’s a simple matter of demanding more compensation for
the uncertainty of inflation and the currency value,” he said.

Mexico’s central bank chief has few such worries.

“For a central bank there is no better combination … than
an accelerating growth rate and lower inflation,” Banco de
Mexico chief Agustin Carstens said on Wednesday.
[ID:nN06202736].

Severe weather in northern Mexico had policymakers fearful
earlier this year that inflation would be reflected in crop
failures but those concerns never materialized.

At an annual banking convention in the resort city of
Acapulco on Thursday Carstens said high commodities prices had
so far not reflected on Mexico’s inflation.

Mexico’s annual rate of inflation slowed more than expected
in March to its lowest level in nearly five years, giving the
central bank ample room to keep borrowing costs on hold.
[ID:nN07283537]

Analysts polled by Reuters expect Mexico to keep rates on
hold until early 2012. Thursday’s data could push policymakers
in Brazil to hike rates again before the end of April.

On Thursday evening, the central bank in Peru boosted its
benchmark lending rate to 4 percent in a move anticipated by
analysts. [ID:nN07113749]

TOUCHING THE CEILING

Brazil’s 12-month inflation rate climbed to 6.3 percent
from the 6.01 percent in February and inched closer to the
central bank’s inflation limit of 6.5 percent. [ID:nN07268340]

“Underlying trends do not look good,” BNP Paribas told
clients in a note that speculated the central bank might have
to act as prices drift away from its target.

“A worsening inflation picture will likely challenge the
central bank’s ability to avoid hiking for long,” it said.

Brazil and Mexico have benefited from a flood of foreign
cash in recent months as investors from rich countries look for
yields that will outpace low yields in the developed world.

Both countries have taken advantage of foreign interest to
boost foreign reserves. Mexico still welcomes outside cash but
Brazil is trying to slow inflows of speculative cash which are
driving its currency to highs not seen since August 2008.

Brazil on Wednesday announced a tax change to try to curb
the real’s strength but investors ignored the move and pushed
the currency up nearly 2 percent on Thursday.

Analysts also fault policymakers for not acting quickly
enough to keep a lid on consumer demand.

“Overall, we continue to think that the government’s
reluctance to slow domestic demand decisively should keep
inflation high,” Barclay’s Capital wrote in a client note.

In a sign of strong spending by Brazilians, auto sales
clocked a double-digit increase in March. [ID:nN07107104]

Analysts are torn on how policymakers in Brazil will
ultimately resolve the competing pressures of wanting to
control prices while not stepping too hard on growth.

In Mexico, the latest benign data on consumer prices has
some pushing back their bets on the timing of its first
interest rate hike.

“Inflation continues to plummet like a rock,” Nomura’s
Benito Berber wrote to clients, noting that investors are
increasing bets that the Mexico central bank will take its time
with rate hikes.
(Additional reporting by Walter Brandimarte in New York, Jason
Lange in Mexico City and Cyntia Barrera in Acapulco; editing by
Carol Bishopric)

WRAPUP 3-Mexico inflation cools, Brazil hotter in March