Mexico seen keeping interest rates on hold despite hike threat

Fri Nov 30, 2012 12:59am EST

Related Topics

* Banco de Mexico rates seen unchanged at 4.5 pct

* Central bank likely to talk tough on inflation

* Decision due Friday 0900 local (1500 GMT

MEXICO CITY, Nov 29 (Reuters) - Mexico's central bank is expected to keep benchmark interest rates on hold on Friday as slowing inflation takes the sting out of last month's threat of a possible hike to dampen price gains.

The Banco de Mexico said in October it might raise rates "soon" for the first time in four years if price pressures did not abate, surprising investors with its tough tone.

Since then, inflation has eased from a 2-1/2 year high of 4.77 percent in September to 4.6 percent in October, although it still marked five straight months above the central bank's 4 percent ceiling.

Analysts said the central bank would probably still keep a firm stance even as it held rates steady at 4.5 percent.

"On balance I would think that they would stay put," said UBS economist Rafael de La Fuente, adding that a hike was possible but only just.

The Banco de Mexico has not moved rates since mid-2009 as the economy recovered from a deep recession.

Prices have been under pressure from spikes in the cost of eggs and chickens following an outbreak of avian flu in western Mexico. But inflation eased further in early November, backing the view of central bank governor Agustin Carstens that price rises have peaked in Latin America's second-biggest economy.

The central bank also has less room to raise rates since the economy is losing steam in the second half of the year, notching 3.3 percent growth in the third quarter as the global slowdown finally begins to bite.

The finance ministry is forecasting a moderate expansion of 3.5 percent to 4.0 percent for the whole of 2012.

The mix of easing inflation and decelerating growth had most market watchers predicting that rates will remain on hold.

Nineteen out of 20 analysts polled by Reuters said Banco de Mexico would hold rates this month, although one tipped a raise.

The median of 13 analysts' estimates showed the central bank would raise borrowing costs by 25 basis points in the second quarter of 2014, compared to a median estimate of a hike in the first quarter of 2014 in a poll in October. Markets are betting on such a hike by January 2014.

"By [the bank's] very own metrics, we see some improvement in some of the things that worry them," said De La Fuente, who noted an easing in wage increases and lack of contagion to the services sector.

The central bank said last month one of its main inflation worries was a recent pick-up in salaries, where growth accelerated to close to 5 percent annually in September, and said that a return of financial market turbulence could not be ruled out. In October, wage growth eased to 4.23 percent.

Concerns have risen this month that U.S. lawmakers could fail to stave off impending tax hikes and spending cuts set to take effect next year. The so-called "fiscal cliff" could drag down growth in United States and hit demand for Mexican exports.

On the other hand, the Banco de Mexico, which targets inflation of 3 percent with a one percentage point tolerance band, has said that the 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.

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