* Banco de Mexico holds interest rate at 4.5 pct
* Central bank moves to easing bias on rates
* Bank sees downside risks to growth, tamer inflation
By Krista Hughes and Michael O'Boyle
MEXICO CITY, Jan 18 Mexico's central bank held
borrowing costs steady on Friday, but said it could cut interest
rates if inflation continues to cool and economic growth flags,
dropping its recent threat to tighten policy.
Policymakers said inflation appeared to be in a downtrend in
Latin America's second biggest economy after a recent spike,
while noting that exports were being hurt by weak global growth.
"It may be advisable to reduce the overnight interbank
interest rate to allow the economy to adjust to a situation of
lower economic growth and lower inflation," the central bank
said in a statement.
Late last year, the central bank had threatened to hike
rates after a jump in inflation. Although analysts had expected
the bank to back away from that threat, the mention of a
possible cut to borrowing costs took the market by surprise.
Mexico's peso weakened and yields on Mexican
interest rate swaps fell as investors began to price in
the chance of a cut over the next two years.
Analysts doubted, however, the central bank would cut
interest rates anytime soon as it monitors both growth and
The Banco de Mexico left its benchmark interest rate
steady on Friday at 4.50 percent, as expected by 20
analysts polled last week by Reuters.
"What we have to evaluate after the dust settles in the
coming weeks is if they will cut or not," said Benito Berber, an
analyst at Nomura Securities in New York. "That is going to be a
function of what happens with the growth data."
Solid U.S. demand has helped shield Mexico from more
sluggish growth around the world. Still, the government sees
growth slowing from an expected 3.9 percent in 2012 to 3.5
percent this year.
The central bank said the pace of growth was not pressuring
inflation while some components of domestic spending have fallen
along with exports.
Data last week showed the annual pace of Mexican consumer
price increases dipped to 3.57 percent in December, below the
central banks 4 percent limit. The rate hit a 2-1/2-year high in
September on a spike in food costs, which has faded.
The central bank said on Friday that inflation should remain
below 2012 levels this year and stay close to 3 percent.
BARK, NO BITE?
The yield on Mexico's two-year interest rate swap
, one of market players' most popular vehicles to
bet on monetary policy, bid nearly 16 basis points lower, on
track for its biggest one-day drop since last May.
Mexico's central bank has convinced the market previously
that an interest rate cut was coming, only to disappoint
"Our formal call continues to be that they are not going to
cut this year," said Ezequiel Aguirre, a strategist at Bank of
America in New York. "But the market takes it as though the
possibility is increasing."
Analysts expected the recent exit of Deputy Governor Jose
Julian Sidaoui, who was considered one of the board members most
concerned about inflation, would contribute to a statement that
expressed less worry about consumer price increases.
Friday's decision was taken by four members. Congress still
needs to approve economist Javier Guzman, who was nominated last
month by President Enrique Pena Nieto in his first month in
Inflation expectations have remained largely stable. A poll
from Banamex last week showed the median of economists expect
the annual rate will end 2013 at 3.79 percent, up 4 basis points
from a poll in December.