Mexico's central bank likely to hold interest rates steady

MEXICO CITY, March 21 Fri Mar 21, 2014 2:01am EDT

MEXICO CITY, March 21 (Reuters) - Mexico's central bank is expected to hold its main interest rate steady on Friday as policymakers balance the impact on inflation of new taxes and a weak peso with the drag on consumer prices from sluggish economic growth.

Analysts in a Reuters poll last week unanimously projected that the central bank will hold its benchmark rate at a record low of 3.5 percent to help nurse economic recovery.

Annual inflation in Mexico cooled off an eight-month high in February as the effect of new taxes from a fiscal reform eased, backing bets that the central bank will keep interest rates on hold this year.

Policymakers have argued that the rise in inflation is probably temporary, but they are watching for any signs of a wider contagion to consumer prices, such as worsening inflation expectations or a jump in wages.

Inflation is still running above 4 percent, the central bank's limit for acceptable price gains.

In the central bank's last statement at the end of January, policymakers warned that a weak peso could further fuel inflation. The peso slumped sharply to a 1-1/2 year low in January as investors dumped emerging market assets.

The currency has bounced back since then, but policymakers are likely still wary that concerns about less U.S. monetary stimulus could further hurt the peso and risk adding to inflation pressures by making imports more expensive.

Central Bank Governor Agustin Carstens said last week he expects inflation to head back toward the bank's 3 percent target, but he said that policymakers will remain vigilant for any signs of price contagion.

The central bank lowered borrowing costs in September and October after an economic contraction in the second quarter and policymakers are expected to keep rates steady amid a tepid recovery in U.S. demand for Mexican exports.

Analysts expect Mexico's economy to grow around 3.4 percent this year after it expanded only 1.1 percent in 2013. The government has so far stuck to estimates for 3.9 percent growth in 2014.

The median of analysts' projections say the central bank will raise its benchmark rate to 3.75 percent in the first quarter of 2015, on par with estimates in a poll released in January. (Reporting by Michael O'Boyle; Editing by Eric Walsh)

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