UPDATE 1-Mexico central bank sees easing inflation but notes peso risk

Fri Feb 14, 2014 11:00am EST

By Michael O'Boyle

MEXICO CITY Feb 14 (Reuters) - The majority of Mexico's central bankers board expect a recent spike in inflation will soon abate, minutes released on Friday showed, but they said they were monitoring the risk that a weak peso could fan consumer prices higher.

Central Bank board members voted 5-0 at their Jan. 31 meeting to hold their benchmark rate at a record low of 3.50 percent despite a surge in inflation.

Most of the policymakers said there was no evidence that new taxes were spurring wider price pressures, backing expectations that the central bank will hold interest rates steady this year to support a recovery in Latin America's No. 2 economy.

However, the majority said they were monitoring the risk that a global sell-off in emerging market assets could further hurt the peso and add to consumer price pressures.

Mexico has stood apart from other emerging markets such as Brazil and Turkey, which are raising interest rates to prop up their currencies and counter the risk that higher import prices will push up inflation.

"All members agreed they would closely follow the impact of tax reform on inflation," the minutes said. The entire board also agreed they would raise interest rates if they saw recent tax hikes spurring wider price pressures.

Banco de Mexico Governor Agustin Carstens said on Wednesday that inflation had likely peaked in the first half of January even as policymakers said consumer prices would be higher this year than they forecast back in November.

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 central bank said in its report that annual inflation would remain above 4 percent in the first months of 2014 but that it would fall below that level toward the end of the year.

A Banamex poll last week showed the median estimate is for the central bank to raise rates in March 2015.

FILED UNDER: