UPDATE 2-Mexico holds key interest rate, sees inflation easing over longer term

Fri Sep 5, 2014 1:25pm EDT

(New throughout, adds central bank quote on inflation forecasts)

By Alexandra Alper

MEXICO CITY, Sept 5 (Reuters) - Mexico's central bank kept interest rates on hold on Friday, highlighting stronger economic growth and forecasting that inflation pressures would ease in the first half of 2015, boding for steady borrowing costs ahead.

The Banco de Mexico maintained its benchmark interest rate at a record low of 3 percent, as expected by analysts polled by Reuters, after policymakers surprised markets by delivering a 50 basis point cut in June.

Growth wobbled early this year, as a harsh U.S. winter hammered American demand for Mexican factory exports and a tax hike dragged on consumer spending.

But data last month showed second-quarter growth beat expectations thanks to a pick up in industrial activity and domestic demand, bolstering bets that economic expansion could reach the finance ministry's 2.7 percent growth forecast for 2014.

Policymakers said stronger external demand and a slight recovery in domestic spending fueled the pick-up, but said slack in the economy would keep stronger growth from fanning price pressures.

Owing to short-term pressures like cattle prices, annual inflation would likely take longer than earlier forecast to cool toward the bank's target of 3 percent a year, according to the bank.

"It is expected that inflation will close 2014 at around 4 percent," the bank's board said in a statement on Friday. "There will be a significant decrease (in inflation) at the beginning of 2015, and it will near the 3 percent level during the first half of the year and close 2015 around that level."

In July, the central bank had forecast inflation would be in around 3 percent in January, and Central Bank governor Agustin Carstens said last week he saw "very good prospects" that inflation will near the target at the beginning of next year.

Mexico's central bank has a tolerance band of 1 percentage point for its inflation target of 3 percent.

Annual inflation stayed above the central bank's 4 percent tolerance ceiling in early August but eased slightly from late July.

But Mexican fiscal policy, which is expected to tighten next year, gives the bank another reason to keep monetary policy on hold longer, Barclays said in a client note.

Meanwhile, the U.S. Federal Reserve is not likely to begin its hiking cycle until the second quarter, according to a Reuters poll, easing pressure on Mexican policymakers to raise rates.

"All in, Banxico is far from implementing a hiking cycle, while no more cuts will be implemented, unless the economy does not consolidate its recovery," Barclays said in a client note.

The median forecast of analysts surveyed by Reuters is for the central bank to raise its benchmark rate 50 basis points in the third quarter of 2015.

(Reporting by Alexandra Alper, Dave Graham, Simon Gardner, Editing by W Simon)

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