Mexico seen holding interest rates, signals on easing eyed

Fri Apr 26, 2013 1:00am EDT

Related Topics

* Banxico rate decision due 0900 local time/ 1400 GMT

* Reuters poll sees pause after cut to 4 pct in March

* Recent data back case for further easing, but later

MEXICO CITY, April 26 (Reuters) - Mexico's central bank is expected to keep interest rates unchanged on Friday after a surprise cut last month, but analysts are looking for signs policymakers are prepared to give another jolt to the economy given recent weak performance.

All 21 analysts polled by Reuters forecast the Banco de Mexico will keep rates at a record low 4 percent this month after it cut them for the first time in nearly four years in March.

Markets are pricing in a good chance of another 25 basis point cut in the second half of the year, when inflation is forecast to decline and a expected pick-up in the United States should boost growth prospects in Mexico.

But policymakers will have to take into account a spike in consumer prices that has taken inflation above the central bank's ceiling in March and early April.

"We think the post-meeting communique will strive to find a delicate balance: signaling a readiness to tighten in response to high inflation, but heavily discounting this option and showing readiness to provide support for growth if necessary," BNP Paribas economist Nader Nazmi said.

"The statement may come across as neutral-to-dovish."

Chief among the central bank's concerns is the rising peso , up almost 6 percent so far this year on the back of strong capital inflows, fanning worries about softening growth.

Mexico has absorbed $160 billion in new foreign investment in its financial markets in the last three years, pushing stocks and bonds to record highs. Analysts say stimulus by the Bank of Japan could spur fresh inflows.

The stronger currency does help keep a lid on inflation by capping the price of imported goods. Inflation accelerated to a seven-month high of 4.72 percent in early April, although governor Agustin Carstens has said it should dip below 4 percent around mid-year and be close to 3 percent by year-end.

Banco de Mexico targets inflation of 3 percent, with a one percentage point tolerance zone either side.

Mexico's strong currency contrasts with recent weak economic data suggesting economic growth slowed in the first quarter of 2013, after picking up at the end of 2012.

Retail sales fell in February by the most in 3-1/2 years and industrial output growth slowed. The trend continued in March, with the jobless rate rising and consumer confidence and factory activity deteriorating for the third month running.

Still, some said the central bank would take care not to hint too strongly at cuts in the statement accompanying the rate decision, given the spike in inflation and policymakers' warning in March that the cut was not the start of a cycle.

"It will be difficult for the central bank to validate rate cut expectations until headline inflation retreats back inside the target band," Jefferies Latin America strategist Siobhan Morden said.

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