UPDATE 2-Mexico central bank holds interest rates, eyes weak growth

Fri Mar 21, 2014 12:20pm EDT

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MEXICO CITY, March 21 (Reuters) - Mexico's central bank kept interest rates on hold on Friday, pointing to slack in the economy while noting that a recent spike in inflation had eased and was unlikely to spur wider price pressures.

The Banco de Mexico maintained its benchmark interest rate at a record low of 3.50 percent, as expected by analysts polled by Reuters last week.

Policymakers said there was less chance of sustained price pressures after inflation cooled in February but they noted that the outlook for growth had yet to improve significantly.

"The board will remain alert to all factors that could affect inflation and its expectations for the medium and long term, especially the evolution of the degree of slack in the economy," the central bank said.

Mexican growth sank to a four-year low of 1.1 percent last year as consumer spending and industry disappointed, clouding hopes for a strong recovery in Latin America's No. 2 economy this year.

Wobbly U.S. demand for Mexican factory exports and weak consumption have cast doubts on the government's forecast of 3.9 percent growth in 2014, despite a raft of reforms approved last year to juice the economy over the long term.

"Economic conditions still aren't anchored enough to allow the central bank to raise rates," Esteban Velazquez, an analyst at Allianz Fondika.

Analysts polled by Reuters do not expect the central bank to raise rates until early 2015.

Policymakers noted that the weak economy was unlikely to add to consumer price pressures and that all signs continued to point to the surge fading in the short term.

Inflation in February eased off an eight-month high the month prior, which was fueled by new taxes on junk food and sodas.

Mexico's central bank targets inflation of 3 percent with a 1 percentage point tolerance band on either side.

Policymakers had cut rates in September and October to boost growth, but January's price spike pushed inflation above the central bank's 4 percent limit for acceptable price gains. (Reporting by Alexandra Alper, Michael O'Boyle and Gabriela Lopez; Editing by Dave Graham, Toni Reinhold)

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