Mexico central bank seen holding rates as economy drags

MEXICO CITY, April 25 Fri Apr 25, 2014 1:00am EDT

MEXICO CITY, April 25 (Reuters) - Mexico's central bank is expected to hold its main interest rate steady on Friday as easing inflation pressures give policymakers room to leave borrowing costs low to support an economic recovery.

All 25 analysts surveyed by Reuters last week expected the central bank to hold its main interest rate at a record low of 3.50 percent. The bank will issue its decision on Friday at 9 a.m. local time [1400 GMT].

Mexican annual inflation eased for the third month in a row in early April and policymakers are seen keeping borrowing costs steady into next year, in contrast to top regional economy Brazil that has raised interest rates to fight inflation.

"We expect the monetary authority to remain on hold for the foreseeable future unless the economy remains very weak and the output gap continues to widen," Goldman Sachs economist Alberto Ramos wrote in a note.

While Mexico's central bank is likely to highlight weaker than expected growth so far this year, they are unlikely to signal any willingness to lower interest rates since the U.S. Federal Reserve has begun to unwind its monetary stimulus.

Foreign investors have amassed a record 1.9 trillion pesos ($145 billion) of local currency debt and any move to lower Mexican interest rates as U.S. yields rise could undermine the appeal of local assets and weaken the peso currency. A weaker peso could fan inflation by driving up import prices.

Early this year, a jump in consumer prices, due mostly to new taxes on soft drinks and junk food, pushed annual inflation above the central bank's 4 percent threshold, but the pace of price gains has eased.

Growth sank to a 4-year low of 1.1 percent in 2013 and a weak start to the year has pushed economists to lower their outlook for this year. Minutes from the central bank's last meeting in March showed most policymakers think they need to cut their 3-4 percent growth forecast for this year.

Data this week showed retail sales fell for a third month in a row, underscoring weak domestic demand. The economy is seen expanding 3 percent this year according to a Banamex poll published this week. ($1 = 13.1090 Mexican Pesos) (Reporting by Michael O'Boyle; editing by Andrew Hay)

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