WRAPUP 1-Mexico central bank ready to act but cautious on Fed

Fri Jul 26, 2013 11:52am EDT

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* Banco de Mexico sees increased risks to growth

* Unanimous in holding rates at 4 percent in July

By Alexandra Alper

MEXICO CITY, July 26 (Reuters) - Mexico's central bank is ready to stimulate the economy if growth keeps slowing but policymakers are cautiously monitoring local markets for turbulence if U.S. economic stimulus is unwound as expected, minutes of its July meeting showed.

Mexico's factory exports dipped in June as vacillating U.S. demand kept dragging on growth in Latin America's No. 2 economy.

Minutes of the central bank meeting, released on Friday, showed policymakers were unanimous in leaving rates on hold at 4 percent, the level reached after a cut in March. Most saw increased risks to growth ahead, adding to uncertainty about further easing.

"All members stressed that the board has to keep following the economy closely and that it will take the appropriate actions if they are necessary," the minutes said.

Policymakers also pointed to expectations the U.S. Federal Reserve could soon begin to curb its stimulus. This would make a rate cut in Mexico unlikely because investors attracted to higher U.S. yields might pull capital out of the country.

"You can see they are worried about how to act if volatility increases in the context of the Fed changing its monetary position," said Barclays economist Marco Oviedo, who expects rates to remain on hold for the rest of the year.

Concerns about the Fed's actions drove Mexico's peso to its weakest in nearly a year in June, but it has rebounded.

Still, some analysts saw confirmation that the central bank could cut rates again if growth remains sluggish, the Fed does not move quickly to withdraw stimulus and if the currency surges back to around 12 per dollar, from around 12.71 now.

"To me, they are setting the ground to cut. We haven't changed our view that they will probably deliver a cut in September," said Standard Chartered economist Italo Lombardi.

Weak exports contributed to slower-than-expected growth in the first half of the year and expectations for the Mexican economy could erode further if exports do not show a recovery in the third quarter.

Economists have been revising down economic growth expectations. The median of a poll from Banamex this week projected growth of 2.7 percent this year, down from a median estimate of 3.05 percent registered in a poll from late May.

Separate data on Friday showed manufactured exports, excluding vehicles, slipped 1.07 percent compared with the previous month, although automotive exports rose.

Minutes showed the majority of central bankers agreed inflation risks had lessened and did not see an impact on inflation expectations from the peso's depreciation.

Mexico's annual inflation rate eased more than expected in the first half of July to 3.53 percent, below the central bank's 4 percent ceiling, giving policymakers room to cut interest rates -- in theory, at least.

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