UPDATE 2-Mexico central bank says inflation has likely peaked

Wed Feb 12, 2014 4:13pm EST

By Michael O'Boyle and Tomas Sarmiento

MEXICO CITY Feb 12 (Reuters) - Mexico's central bank on Wednesday said that a recent spike in inflation had likely peaked, suggesting policymakers will leave interest rates steady this year.

Banco de Mexico Governor Agustin Carstens said at the presentation of the bank's quarterly report that policymakers would act if they saw that a recent jump in consumer prices was spurring wider price pressures, such as higher wages.

Consumer price inflation in Latin America's No. 2 economy rose to an eight-month high of 4.48 percent in January due mostly to a new tax on soft drinks, surging past the central bank's limit of 4 percent.

"The shocks we are seeing are transitory," Carstens said. "We would raise interest rates if we saw evidence of second-round effects."

Carstens said inflation had likely peaked during the first half of January, when the new taxes took effect, and price behavior in the second part of the month suggested the tax hike was not spurring wider price pressures.

The central bank said in its report that annual inflation would remain above 4 percent in the first months of 2014 before falling below that level in the second half of the year. Last November, the central bank forecast inflation of around 3.5 percent this year.

Mexico's central bank kept its main interest rate on hold at a record low 3.50 percent on Jan. 31, saying it would watch inflation expectations while also making sure a slump in the peso does not stoke further price pressures.

The recent rise in inflation had prompted bets in the interest rate swap market for a hike this year. A Banamex poll last week showed the median estimate is for the central bank to raise rates in March 2015.

NO SELL-OFF

Carstens said there was little chance that Mexico's central bank would resort to discretionary intervention in the foreign exchange market amid a global slump in emerging market assets.

The country's peso is down more than 2 percent this year, but Mexico has eschewed the forms of direct intervention used by other emerging economies to prop up their currencies.

Carstens also said he doubted there would be a "selloff" of Mexican assets since the Mexican economy was stronger than other emerging markets.

Foreign holdings of Mexican peso debt have grown nearly seven-fold since the end of 2008 to more than 1.8 trillion Mexican pesos ($135 billion) and a mass exit by foreigners would hammer the peso.

The central bank said the economy grew around 1.2 percent in 2013 and it stuck to its forecast for an expansion in 2014 of between 3.0 percent and 4.0 percent.

Sluggish growth will also keep price pressures down. The bank said the output gap would remain negative during 2014, which means the economy will not be growing fast enough to add to inflation pressures this year.

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