UPDATE 2-Mexican central bank holds rate steady, warns of rise
(Adds detail, quotes and byline)
By Jason Lange and Noel Randewich
MEXICO CITY, Feb 23 (Reuters) - Mexico's central bank held its benchmark overnight interest rate steady at 7 percent, as expected, on Friday but clearly warned it would act if core inflation does not begin to ease in March.
In comments seen as increasingly explicit, the central bank said it will closely watch core inflation to make sure it starts falling next month.
"If it doesn't, the board will tighten monetary policy in order to bring inflation in line with the goal," the bank said.
The remark hurt the peso as foreign investors dumped Mexican local currency bonds.
"The central bank is putting its cards on the table," said David Franco, an economist at JP Morgan in Mexico City.
Increased prices for many staple foods, including tortillas, have pushed up inflation in recent months. But the central bank says the price rises are only temporary.
On Friday, the bank said that the isolated price increases have not spread to other areas of the economy.
The central bank said it saw the annual headline inflation rate at 4 percent to 4.5 percent until the third quarter, and down to 3.5 percent to 4 percent by year-end.
The bank's annual inflation target is 3 percent. But it has in the past fixed 4 percent as the upper limit of what it sees as acceptable.
The price of Mexico's benchmark 10-year government peso bond MX10YT=RR fell 0.45 for a yield of 7.79 percent. It was trading at 7.74 percent before the central bank's announcement, and at 7.72 percent late on Thursday.
The peso MXN= MEX01 traded 0.37 percent weaker at 11.041 per dollar.
Twelve-month headline inflation rose to 4.06 percent in the first half of February, while core inflation, excluding energy and some food products, climbed to 3.95 percent, according to a report released on Thursday.
Core inflation is seen as a good way to predict long-term inflation because it omits prices of products considered unusually volatile.
For text of central bank statement, please click on [nN23277568]
