Feb. 13 (Bloomberg) -- From Mexico to Poland, bond investors are lowering their outlook for inflation in developing markets to a nine-month low, giving central bankers room to cut interest rates and boost their economies. The difference between fixed-rate bond yields and those indexed to consumer prices show investors expect Mexico’s inflation to average 3.26 percent in the next two years, near the slowest since May. A similar Polish measure fell to 2.09 percent last month, the lowest since at least April. Emerging- market bonds gained 5 percent in dollar terms during the three months through yesterday, the most in a year, compared with 0.1 percent for government securities worldwide, JPMorgan Chase & Co. and Bank of America Corp. indexes show. “We see only moderate growth compared to recent years, and these solid but hardly effervescent economic conditions should keep inflation in check,� Alessandro Bee, an economist and fixed-income strategist in Zurich at Bank Sarasin & Cie AG, which oversees 99 billion Swiss francs ($108 billion), said in a phone interview on Feb. 4. “That’s a really nice environment for local bond markets.� While investors see inflation in the biggest emerging markets such as China and Brazil rising, the tame outlook elsewhere will allow policy makers to focus on bolstering the weakest economic growth since 2009 through lower rates, according to Bank of America. IMF View The rate of inflation in developing markets will remain at 6.1 percent in 2013, slowing from a four-year high of 7.2 percent in 2011, the International Monetary Fund in Washington said last month. India, Poland, Colombia and Hungary have cut borrowing costs this year, in part because consumer prices are under control. Traders anticipate looser monetary policy in South Korea, Poland, Colombia and Hungary, according to a Morgan Stanley model that tracks interest-rate swaps. That’s a reversal from two years ago, when a 55 percent jump in the Standard & Poor’s GSCI index of 24 raw materials in 11 months through April 2011 pushed up consumer prices and led central banks from China to Brazil to raise borrowing costs. Brazil boosted rates 3.75 percentage points to 12.5 percent in the 15 months through July 2011. China lifted its one-year lending rate five times in nine months starting October 2010. Growth Throttled Those moves throttled emerging-market growth to 6.3 percent in 2011 from 7.4 percent the year before, and punished bond investors, with JPMorgan’s GBI-EM Global Diversified Index losing 4.9 percent in dollar terms between mid-October 2010 and mid-January. That was worse than the loss of 3.6 percent for government securities worldwide, according to the Bank of America Merrill Lynch Global Government Index. In Mexico, central bank board members led by Governor Agustin Carstens unanimously decided to leave the benchmark interest rate at a record low 4.5 percent on Jan. 18, and signaled this month that they may lower borrowing costs for the first time since 2009 as inflation moderates. “If the outlook described is consolidated, a reduction in the benchmark overnight interbank interest rate may be advisable,� Mexico’s policy makers said in the minutes of the January meeting published Feb. 1. Slower Pace Consumer prices in Mexico rose at a 3.25 percent annualized rate in January, the slowest pace since October 2011, after falling within the central bank’s target range of 2 percent to 4 percent in December for the first time since May. The two-year breakeven rate in Mexico narrowed from a 16- month high of 4.54 percentage points in July, according to data compiled by Bloomberg. The rate averaged 4.04 percentage points since October 2006, when Bloomberg started compiling the data.

Source