Reuters: US Dollar Report: UPDATE 2-Mexico central bank keeps rate steady but may hike soon

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UPDATE 2-Mexico central bank keeps rate steady but may hike soon Oct 26th 2012, 16:18 Fri Oct 26, 2012 10:46am EDT * Central bank holds rates at 4.5 pct, as expected * Says could raise rates soon if inflation shocks persist * Sees higher risks to both growth and inflation By Alexandra Alper and Krista Hughes MEXICO CITY, Oct 26 (Reuters) - Mexico's central bank left benchmark interest rates unchanged Friday, as expected, but warned it could tighten monetary policy soon if inflation shocks persist and price pressures do not start to abate. The Banco de Mexico, which has not moved rates from their current 4.5 percent level since mid-2009, said risks to both growth and inflation had worsened, although it expected that inflation had peaked at the 2-1/2 year high reached in September. "Nonetheless, if inflation shocks persist, even if you assume that they are temporary, and a change in the trend of headline and core inflation is not confirmed, the board estimates that it could be appropriate to adjust rates upwards soon," policymakers said in a statement. The surprisingly tough stance pushed the peso into positive territory and fixed-income markets moved to price in an earlier rate increase. Interest rate swaps suggested a 25 basis point increase as soon as July 2013, from early 2014 before the statement. Policymakers have been projecting slower growth in the second half of 2012, but four months of above-target inflation gave the bank little room to stimulate the economy. Annual inflation has been climbing since April but eased to 4.64 percent in the first half of October, fanning hopes that price increases have peaked in Latin America's second-biggest economy. Food prices have been under pressure from spikes in the cost of eggs and chickens following an outbreak of avian flu in western Mexico. Data released on Wednesday showed fresh produce prices fell 0.39 percent from a month earlier, although they were still 16.27 percent higher than the same time last year. Mexico's economy grew an average 4.3 percent in annual terms in the first half of the year, but the finance ministry is predicting a more moderate expansion of 3.5-4.0 percent for the whole of 2012. Data released earlier this week showed the economy's annual rate cooling to 3.51 percent in August, despite a welcome rebound in retail sales in the same month. The Banco de Mexico, which targets inflation of 3 percent with a one percentage point tolerance band, said that the recent rise in the peso, prompted by U.S. Federal Reserve's third round of bond-buying, should help cool Mexican inflation. The U.S. action may attract funds into Mexico, putting upward pressure on the peso and trimming the cost of imported goods. Link this Share this Digg this Email Reprints

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