WRAPUP 1-Mexico central bank splits over rate cut, outlook

Fri Mar 22, 2013 2:38pm EDT

Related Topics

* First divided decision on interest rates on record

* Board leaves door open to further easing if growth slows

* Inflation picks up to 4.12 pct in year to mid-March

By Michael O'Boyle and Krista Hughes

MEXICO CITY, March 22 (Reuters) - Mexico's divided central bank hinted on Friday it could cut interest rates again, and analysts said policymakers would have the room to ease further this year if the peso currency continues to surge.

Minutes of the last Banco de Mexico meeting showed the decision to cut borrowing costs to a record low of 4.0 percent split the board 4-1.

Policymakers suggested they might act again if needed, sowing confusion about whether they would be willing to lower rates again later in the year.

"The majority clarified that while the interest rate cut was a one-off, (the board) at all times will evaluate the most adequate monetary policy for the economic environment," the minutes said.

Policymakers are worried investor optimism, spurred by the new government's push to pass long-stalled economic reforms, could fan capital inflows even higher this year and drive the peso to the point where it begins to hobble exporters.

Central bank chief Agustin Carstens is confident a current blip higher in inflation will quickly fade. Even though the central bank had said the cut was a one-off move, analysts said it could ease again if peso gains become extreme.

"I think they will definitely adjust if they see pressures in the future," said Barclays Capital economist Marco Oviedo.

"If the peso remains like this, there is no improvement in Europe and unemployment in the United States does not fall below 7 percent, liquidity conditions will continue and more money will come in."

Mexico's peso firmed 0.5 percent to 12.3780 on Friday, heading back toward a more than 1-1/2 year high hit earlier this week.

The peso has been helped by Mexican lawmakers approval of a sweeping telecommunications bill that is aimed at fostering competition in the industry, which is dominated by billionaire Carlos Slim.

The minutes showed the majority were concerned that rock-bottom rates in developed countries could attract more foreign capital and believed inflation was on a clear path towards the central bank's 3 percent goal.

But data on Friday confirmed inflation has begun to quicken. It accelerated more than expected in early March to 4.12 percent, above the central bank's 4 percent ceiling.

The minutes showed most policymakers saw inflation remaining around 4 percent in the next few months, before heading down towards 3 percent in the second half of the year.

LONE HAWK

But one argued that there was no clear sign of a downwards trend and that having a lower interest rate would make it more difficult to bring inflation down to 3 percent.

"He added that if inflation pressures increase, it would be necessary to adjust the interest rate even more drastically, which could hinder the economy's progress and make controlling inflation more costly," the minutes said.

Before the meeting, central bank board member Manuel Sanchez had said a rate cut would be premature, arguing that both the downward trend in inflation and inflation expectations had yet to be confirmed.

Some analysts said the central bank would not have room to cut if the Mexican and U.S. economies picked up in the latter half of the year, especially if expectations build that the U.S. Federal Reserve will start to withdraw stimulus.

"It does open the door to a movement, but it could be in either direction," said Delia Paredes, economist at Banorte-IXE.

Although U.S. demand for manufactured goods supported growth last year, most policymakers saw a weak global environment and expressed concern about a slow recovery north of the border, the destination for almost 80 percent of Mexico's exports.

Most board members at the rate meeting, which was attended for the first time by Finance Minister Luis Videgaray, said the domestic economy had begun to show signs of slowing. This reflected weaker momentum in the global economy, which had also affected internal demand.

Mexico has forecast growth of 3.5 percent this year, down from 3.9 percent in 2012.

Separate data showed unemployment was better than expected in February, with the seasonally adjusted jobless rate falling to 4.76 percent, from 5.21 percent.

But economists at Banorte-Ixe said the fall contrasted with general weak data in early 2013, and it was too early to say if the jobless trend had turned a corner.

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